The catalyst
Vivendi said it would sell $5.8 billion worth of its Activision Blizzard, Inc. (NASDAQ:ATVI) shares back to Activision for $13.60 per share, at a 10% discount at the time. Vivendi will lose its majority shareholder title, and will be left with just 12% of the company by still holding 83 million shares. The deal would boost earnings by between 23% and 33% (non-GAAP). Earnings will rise by between 18% and 29% on a GAAP basis. Activision will finance the deal by issuing debt: a whopping $4.6 billion. The $1.2 billion in domestic cash will also be used to fund the purchase. This leaves a comfortable $3 billion of cash on the balance sheet.
Raw deal for investors
The share buyback merits a rally in Activision Blizzard, Inc. (NASDAQ:ATVI) shares because the company will not have Vivendi as a majority shareholder. Activision should have greater freedom in pursuing its business objectives without the meddling of Vivendi. The problem with this argument is that Vivendi never interfered with the way Activision was run. The conglomerate only distracted Activision by seeking ways to sell its position.
Activision Blizzard, Inc. (NASDAQ:ATVI) is essentially leveraging its balance sheet to boost earnings per share, by taking advantage of extraordinarily low interest rates.
Many risks ahead
Activision must believe that it can generate a return higher than the interest paid to fund its debt. The company is doing well on most products. The game Call of Duty, for example, is a solid franchise that breaks records every time a new version is release. Conversely, popularity for World of Warcraft is dropping precipitously. Monthly subscribers dropped to 7.7 million, down from 8.3 million in May. If users continue to lose interest, a drop in subscriptions could make it more difficult for Activision Blizzard, Inc. (NASDAQ:ATVI) to fund its debt load.
A strain on its balance sheet could force Activision to cut operating costs, which would includes jobs.
Alternative investments
Activision Blizzard, Inc. (NASDAQ:ATVI)’s market capitalization is more than double that of Electronic Arts Inc. (NASDAQ:EA), even after the appreciation in Electronic Arts Inc. (NASDAQ:EA) shares. Still, investors might want to look at EA or Take-Two Interactive Software, Inc. (NASDAQ:TTWO).
| NAME | MKT CAP, $ |
|---|---|
| Electronic Arts | 7.75B |
| Activision Blizzard (NASDAQ:ATVI) | 20.42B |
| Take-Two Interactive Software | 1.47B |
Data Source: Yahoo Finance
Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is set to release Grand Theft Auto 5 this September. Shares are already up 29.4% in the last six months, so investors might want to wait for a pull-back:
Take-Two Interactive Software, Inc. (NASDAQ:TTWO) issued $250 million worth of convertible senior notes in June. Investors reacted negatively to the news at the time, but the offering is nowhere near as big as the Activision debt-financed share buyback deal.
Sports game maker Electronic Arts Inc. (NASDAQ:EA) is up even more in the same period, up 69%. Electronic Arts Inc. (NASDAQ:EA) reported quarterly earnings that trounced forecasts. The company grew subscriptions for Battlefield 3 by 500,000 units. There are now more than 4 million subscribers for the hot game.
Another reason to like Electronic Arts Inc. (NASDAQ:EA) is that mobile game demand is strong, rising 33% in sales year-over-year, to $104 million. Sales were helped by hot titles like The Simpsons: Tapped Out and Real Racing 3.
Foolish bottom line
Activision could face profit taking in the near future. Investors holding this company should look at Take-Two Interactive Software, Inc. (NASDAQ:TTWO) and EA as alternatives. A buying opportunity is created if Take-Two Interactive Software, Inc. (NASDAQ:TTWO) and Electronic Arts Inc. (NASDAQ:EA) drop alongside any profit-taking in Activision Blizzard, Inc. (NASDAQ:ATVI).
The article Sell This Game Maker, Buy These Two Instead originally appeared on Fool.com and is written by Chris Lau.
Chris Lau has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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