Activision Blizzard, Inc. (ATVI)’s Move To Acquire King Digital Will Strengthen Its Position


Activision Blizzard, Inc. (NASDAQ:ATVI) seems to be having a favorable time to invite investors’ attention to it. The company delivered better than expected financial numbers for the third quarter. Its earnings provided 31.2% of a positive surprise to investors, which would not have surprised considering the preceding two quarters positive surprise percentage of 62.5% and 128.6% respectively. That was primarily due to an increase in digital business witnessed in the last few quarters. The video gaming firm has unveiled its plans to launch a new movie studio recently. On top of these, the company struck a deal to acquire King Digital Entertainment PLC (NYSE:KING) for $18 per share or about $5.9 billion. That should further strengthen its position in the gaming console segment.

Position Itself As Global Leader In Multiple Platforms

Activision Blizzard, Inc. (NASDAQ:ATVI)’s decision to buy King Digital Entertainment PLC (NYSE:KING) would place it as the second biggest interactive entertainment firm based on revenue. China-based TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) remains in the first place and partnering with it on some of the ventures. Activision expects the addition to be increasingly complementary to position itself to compete to reach the top position in the gaming console industry. The company is confident of strengthening its position in different platforms like console, mobile, and PC. That would not only enable them to deliver future growth but would also allow them to realize the benefits of the integration of the two companies.

The advantage that Activision Blizzard, Inc. (NASDAQ:ATVI) counts is that the merged entity would allow them to have some world-class interactive entertainment portfolio. That included two of the top biggest grossing mobile games in the America. Candy Crush Soda Saga, and Candy Crush Saga were the most successful mobile games while Call of Duty was the most successful console game franchise. Similarly, for the PC franchise, the most successful was World of Warcraft. The company has more than 1,000 game titles in its library.

Creation of Big Entertainment Networks

The merger would establish one of the biggest entertainment networks in the world with more than 500 million monthly active users spread across 196 nations. The international audience would reach both the casual, as well as, the core gamers irrespective of the male or female players in the emerging and developed markets around the globe. The significant part of the integration is that Activision Blizzard, Inc. (NASDAQ:ATVI) would be able to establish direct relationships with the diverse and big audience. That would enable them to reach and develop opportunities to cross-promote its content, as well as, engage fresh players with its franchises.

As a result of the acquisition, the gaming firm is expecting to gain significantly in revenue generation. Mobile is the biggest and rapidly-growing area of interactive entertainment. The company expects the industry to generate more than $36 billion of revenue by the current year ends. On top of this, it would grow more than 50% cumulatively between the year s2015 and 2019.

Minimize Tax Implications

Activision Blizzard, Inc. (NASDAQ:ATVI)’s acquisition deal of King Digital Entertainment PLC (NYSE:KING) will minimize tax implications since it would be using $3.6 billion of offshore cash for the purchase. The company would get rest of the funds from Bank of America Merrill Lynch, as well as, Goldman Sachs Group Inc. (NYSE:GS) from the current credit agreement. The deal came at 20% discount to its IPO price of $22.50 in March last year. That is one more point making it attractive deal for Activision, which would benefit about $900 million cash flow from King Digital. That comes to it on very attractive terms.

For the trailing twelve-month period, Activision Blizzard, Inc. (NASDAQ:ATVI)’s delivered adjusted revenues of $4.7 billion. Similarly, King Digital Entertainment PLC (NYSE:KING)’s adjusted revenue for the same period was $2.1 billion. Both the companies have delivered adjusted EBITDA of $1.6 billion and $0.9 billion respectively. The merger would enable them to improve upon its diversified, as well as, recurring revenues, long-term growth opportunities to drive future growth and cash flow generation. The company expects the purchase to be accretive to its adjusted revenues, as well as, EPS by about 30%. Aside from that, free cash flow per share is predicted to be significantly accretive next year. The company indicated that it would maintain a disciplined capital allocation policy.

Stock Price To Increase

Activision Blizzard, Inc. (NASDAQ:ATVI)’s purchase of King Digital Entertainment PLC (NYSE:KING) should translate into several key metric growing significantly. Most importantly, free cash flow should allow them to buy back its shares and increase the dividend rate. Another significant point is that it can continue to involve in acquisition to boost its revenue above the Chinese firm. The integration would enable them to have significant synergies from cost savings, which can be added up to the estimated EPS. It would function as a separate unit.

This would result in the best position to capture the distribution system in the casual gaming sector as there are long-term employment contracts with its senior executives. The acquisition news boosted the shares of the company indicating the investors’ support to it. Jefferies has also lifted its one-year price objective to $45 on the company’s shares.

Conclusion

Activision Blizzard, Inc. (NASDAQ:ATVI)’s acquisition of King Digital Entertainment PLC (NYSE:KING) comes at $4.50 less than its IPO price. That ensures that there is enough upside to be possible. The integration should help both the companies strength and translate into revised EPS and revenue. Both can tap each other’s monthly active users to monetize better than what it is currently. That would make the shares more attractive than now. The company is already delivering blockbuster results.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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