A Massive Buyback
The buyback that has driven Activision’s stock to new highs will unfold in two parts. First, the company itself will use a combination of new debt issues and cash on hand to fund the $5.8 billion repurchase of about 430 million shares. This transaction may include additional assets or tax-related vehicles. As it currently stands, Activision’s buyback price will be fixed at $13.60 per share. This represents a discount of more than 25 percent to the company’s current share price.
The second tranche of the repurchase will be organized by a nominally independent investment consortium that answers to Activision’s CEO. This group will buy back 172 million shares at a final cost of about $2.3 billion. After these transactions have been completed, Vivendi will retain a shrunken Activision Blizzard, Inc. (NASDAQ:ATVI) stake of about 12 percent.
How Competitors Might React
While this is basically an in-house affair, it will have ramifications for Activision’s competitors. As changing consumer tastes force the video game industry to endure a prolonged slump, key players are nervously eyeing one another for signs of serious weakness. Activision’s rather bold move is a show of confidence and power that could make companies like Electronic Arts Inc. (NASDAQ:EA) and Sony Corporation (ADR) (NYSE:SNE) nervous. After all, investors cannot help but be enticed by massive share buybacks.
Long-Term Outlook and Potential Investment Opportunities
Although Activision is getting a very good deal on this buyback, its move is unlikely to drive down its share price. In fact, the market’s reaction to the announcement of the deal suggests that Activision Blizzard, Inc. (NASDAQ:ATVI)’s shares could continue to appreciate. Since the bought-back shares will be removed from circulation, the company’s much lower share count will provide a significant boost to its per-share revenues and earnings. More to the point, it could restore confidence in the company after a very bumpy run.
In sum, investors should look at this situation as an opportunity to accumulate Activision shares at a discount. A slight retrenchment could provide a fleeting opportunity for long-term investors to stock up on the company’s shares. Short-term investors may be able to play the remainder of the bounce for a decent profit as well. Of course, investors are always encouraged to perform their own due diligence.
The article How Will New Independence Change its Fortunes? originally appeared on Fool.com and is written by Mike Thiessen.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Mike 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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