by Andrea Orr
[Posted on December 3, 2007 - 4:56 PM]
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DiggThe video-game industry last year surpassed the music business in total revenues and will likely eclipse the film industry by the end of 2007.
So while key Activision Inc. rival Electronic Arts Inc. might appear to be the company most threatened by the $8.1 billion merger of Activision and Vivendi SA, analysts said the impact of the massive merger extends far beyond the gaming industry and might set off a wave of mergers between traditional media companies and video-game makers.
"To date there has been very little investment in gaming companies by large-cap media companies, but that will change," said Daniel Ernst, an analyst with Soleil Hudson Square Research. "The gaming industry does not get the same broad recognition as standard media, but standard media has been shrinking and games are growing rapidly. Media companies will have to do some deals in this space."
Activision late Sunday announced that the Santa Monica, Calif., company is merging with French conglomerate Vivendi, one of the few mainstream media companies that already has a substantial gaming presence through its ownership of Irvine, Calif.-based Blizzard Entertainment, which published the world's No. 1 online game, "World of Warcraft." The combined company will be called Activision Blizzard.
Under terms of that deal, Vivendi will take a 52% stake in the venture in exchange for contributing its $8.1 billion video-game unit, $1.7 billion in cash and a potential further $700 million payment. The deal represents a strategic bet by Vivendi that gaming can compensate for the sluggish growth in its music, media and telecommunications operations. By contrast, Activision's net income more than doubled in fiscal 2007, to $85.8 million, from $40.3 million in the previous year.
The deal values Activision at 30 times 2007 pro forma earnings, said Ernst, noting that the multiple represents a discount to other video-game companies, which on average trade at 40 times 2007 earnings. "If Activision had sold outright to Vivendi, they would have had to ask for a premium," he said.
The prospects of gaming industry consolidation on Monday boosted the stock prices of several video-game makers. Shares in New York based Take-Two Interactive Software Inc. surged 10.7% to $16.58 by late trade; Redwood City, Calif.-based Electronic Arts rose more than 2%; Konami Corp. of Tokyo jumped 3.9%; and UBISoft Entertainment SA shares rose 5.3%.
"I do believe that consolidation ultimately is inevitable," Take-Two chief executive Ben Feder said on Monday at a UBS Investment Conference, according to Reuters. Although some analysts cited the need for old media to buy into the fast-growing games segment, Feder stressed that it was a two-way street and that many gaming companies would require more cash to fuel growth.
The new business created by the Vivendi-Activision merger will have about $3.8 billion in sales this year, on a pro forma basis, ranking it ahead of Electronic Arts, which expects about $3.1 billion. According to Vivendi, it will also be the only game publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry and will also reach the broadest audience.
"Activision Blizzard is likely to prove tough competition for Electronic Arts," Cowen and Co. LLC analyst Doug Creutz said in a research report.
Still, others such as Ernst of Soleil Hudson Square Research, said EA is in no hurry to respond with its own large deal. The company is buying two software studios, VG Holding Corp. and Pandemic Studios LLC, for $775 million from private equity fund Elevation Partners, and that integration should keep it occupied for some time.
Activision has made nine acquisitions in the past five years. In 2006 it paid $100 million for RedOctane Inc., which developed "Guitar Hero." In 2003 it acquired Infinity Ward Inc., capturing the team of developers that had created "Medal of Honor," one of Electronic Arts' bestsellers.
The team has since developed the "Call of Duty" series for Activision, which has taken in more than $1 billion. --Paul Whitfield in Paris contributed to this report.
