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Activision Blizzard, Inc. (ATVI), Electronic Arts Inc. (EA): A Good Time for This Game Giant to Be Set Free

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Activision Blizzard, Inc. (NASDAQ:ATVI) has agreed to pay Vivendi $5.8 billion for its freedom. With a new game console cycle starting, that’s good timing for Activision.

In 2008, Vivendi merged its video game business with Activision Blizzard, Inc. (NASDAQ:ATVI) in a transaction valued at about $9.8 billion. The move gave Vivendi control over the combined entity. At the time, it allowed the newly merged companies to leapfrog Electronic Arts Inc. (NASDAQ:EA) to become the largest video game maker. Vivendi’s move was a part of its efforts to bulk up its business in the media space.

Activision Blizzard, Inc. (NASDAQ:ATVI) has been a solid success story. The company has posted higher sales every year for the last decade, including through the deep 2007 to 2009 recession. And its earnings have continued to expand of late despite aging game consoles. Electronic Arts Inc. (NASDAQ:EA), on the other hand, saw its top line grow up until the recession, and then it turned inconsistent at best. Revenue fell between fiscal 2012 and fiscal 2013. The bottom line, meanwhile, was mired in red ink over a four-year stretch that ended with a $0.23 a share profit in fiscal 2012.

Activision Blizzard, Inc. (NASDAQ:ATVI)Clearly, of the two, Activision Blizzard, Inc. (NASDAQ:ATVI) has been performing better. That said, Electronic Arts Inc. (NASDAQ:EA) has been more aggressive in expanding into the casual market, buying PopCap and Playfish, and porting some of its “serious” gamer titles into the casual game space. That positions EA well on newer devices like tablets and smartphones. That should be a long-term positive for a company that’s still turning its business around.

After the news of the buyout, Activision Blizzard, Inc. (NASDAQ:ATVI) jumped higher, but its price to earnings ratio of about 14 is still over 30% below its five year average. So the shares are hardly expensive. Although the deal will add some $4.6 billion in debt to the balance sheet and eat up over a billion worth of cash, the company is still a good choice for growth investors.

Game cycle

That’s particularly true since earnings across the video game space have been soft as gamers await new consoles from Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE). The PlayStation 4 and the Xbox One should be out in time for the holiday season. And with them will come a slew of new and updated games. That should turn sales at Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA) higher.

Already financially strong, Activision Blizzard, Inc. (NASDAQ:ATVI) will be able to use improving results to pay down the debt it added to free itself. It might be less aggressive on the acquisition front for a couple of years, however, as it works to de-lever. That said, after the deal, debt will still only make up around a third of the capital structure, so it will have plenty of firepower if the right acquisition candidate comes along.

Electronic Arts Inc. (NASDAQ:EA), meanwhile, will be happy to see sales head steadily higher as gamers upgrade to new consoles. It should provide the sustained boost that it needs to get back on the right track. More aggressive investors might like the turnaround potential that it offers, even though the shares have started to move higher in anticipation of the holiday season.

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