The investment world at least feels that big is beautiful in the world of games creators and publishers, and reacted positively to the merging of Vivendi’s game holdings, which it acquired a decade ago under the banner of Blizzard Entertainment, with Activision, the games business that has been really buzzing of late, second only to Electronic Arts (EA).
This combination now leaps the new merged entity, Activision Blizzard above EA and puts in one camp the publishing rights to Guitar Hero, Call of Duty, Tony Hawk, Crash Bandicoot and World Of Warcraft.
The first thought that US analysts came up with was that EA would be unhappy being pushed into second place, and that it would strike back and push to bid for Ubisoft, a company that it has toyed with buying in the past.
But the most important thing to note was the Vivendi shares themselves, which appeared to be the predator here (although that may not be a fair evaluation since Activision probably was looking to consolidate), also had its share value rise. The market seemed to understand that two mid-sized games publishers are less valuable than one monster sized operation.
French analysts used the platform to call for a further breakup of Vivendi, but of course this deal is the entirely opposite of that, trading its own games empire for a majority in an even larger empire.
The deal was swapping its own Vivendi Games arm plus $1.7 billion of cash, for a 52% holding in Activision Blizzard, which could rise on the back of a fresh issue of Activision Blizzard shares, which is to raise up to $700 million more cash, all of which Vivendi may have to buy, which would give it 68% ownership.
But the underlying truth to take from this is that the games business has changed fundamentally, and right at this present point in time is going through a rich vein of form. The replenishing of the third console generation is at its height, while the unraveling of new mobile handset based gaming revenues is just taking off. And this deal highlights the astonishing rise of internet multiplayer role playing games, which is finally gaining the type of credit that it has always promised. At the same time handheld games devices are running up towards a 100 million installed base and advertising is lending stability and long term revenue to installed games, through in-game advertising and through advergaming, not to mention adverts in casual online gaming.
The industry has never been more resilient against stagnation and inconsistent development cycles, and games franchises have never been so long lived, given that they can move from platform to platform.
In the same way that the moribund industries of cable operators and satellite ownership were the gambling stakes chased during 2004 and 2005 by the Private Equity Community, the games business is fast becoming that kind of playground, and there is a sense that while creative differences kept gaming companies apart in the past, they will now be rammed together for the sake of economies of scale, cost pruning and to give more weight to leverage all the new trends in the industry.
If EA does buy out Ubisoft, it will create the kind of two tier market leadership, which along with the console manufacturers, themselves significant games publishers, could form a magnet for multiple private equity funded moves to offer any one of them control of any remaining strong franchises, over the coming few years.
A few years back EA bought a 19.9% share in French games developer Ubisoft, for just $91 million, but in July his year, after dilution back to 15%, its value had risen to $341 million. Today its closer to $630 as Ubisoft’s revenues have jumped 52% to $382 million for the half year, net income is up to $45 million from a loss last time and its valuation has leapt to $4.2 billion.
Ubisoft holds the Splinter Cell franchise and has just brought out the Beowulf game, as merchandizing for the new blockbuster film of the same name.
So whereas in the past games operations looked like they were huddling together for warmth, closing or selling off development studios, they now look like viable long term businesses, no longer held afloat by a single, fallible franchise.
Ubisoft has made it clear that it wants to remain on its own, and has shied away from a full takeover by EA, and initially bought into Gameloft, to give it the appearance of more weight, but sold that shareholding earlier this year.
In this merger Vivendi is managing to value its Vivendi Games unit at $8.1 billion, and says the total transaction is valued at $18.9 billion, with all shares being valued at $27.50, perhaps in the hope that once the transaction is complete and the stock begins to trade once more, it will reach something like that value. EA right now is valued at $17.6 billion, a couple of percent down on the news of the deal, based on revenues of $3.1 billion; so after the creation of Activision Blizzard, which it claims will have $3.8 billion in pro forma combined calendar 2007 revenues, it’s hard to see where the value will fall. Historically Activision grew to $1.5 billion in revenues, and Vivendi is on track for $1 billion for this calendar year, but both are growing more rapidly than EA.
If the current momentum anything like continues, then the valuation post merger will almost certainly create a new market leader, and a market capitalization higher than the deal value up above $20 billion.
Activision management openly said they were impressed by the massively multiplayer game which is Blizzard Entertainment’s World of Warcraft, which has 9.3 million subscribers. Activision said it had considered trying to build that type of technology and know-how in house, but felt it needed to acquire it.
Activision Blizzard says that now it will be the only publisher with leading market positions across all categories of the rapidly growing interactive entertainment industry. The company will continue to operate as a public company traded on Nasdaq under the ticker ATVI.