Activision buys King with foreign cash
Video game publisher Activision Blizzard (NASDAQ:ATVI) is satisfying its sweet tooth for acquisitions by buying mobile game maker King Digital Entertainment (NYSE:KING), best known for “Candy Crush Saga.”
Activision announced late Monday that it has agreed to pay $18 in cash per share for London-based King, in a deal worth $5.9 billion. The offer is a 20% premium over King’s Friday closing price.
King shares jumped 3.9% to 15.54 on Monday in heavy volume ahead of the acquisition announcement. And King stock was up another 15%, near 18, in early afternoon trading in the stock market today.
Santa Monica, Calif.-based Activision plans to fund the deal with $3.6 billion in offshore cash and $2.3 billion in debt financing. Activision ended the third quarter with $4.5 billion in cash and investments, with $870 million held domestically and the rest offshore.
U.S.-based multinational companies are reluctant to repatriate foreign profits because of hefty taxes. U.S. companies bringing home foreign earnings must pay the full U.S. corporate tax rate of 35%, though they get tax credits for payments to foreign governments.
Activision expects the deal to close in spring 2016, subject to approval from government regulators and King shareholders.
Mobile Games Gain
Activision’s purchase of King Digital will bolster its position in the fast-growing mobile games market, Activision CEO Bobby Kotick said on a conference call with analysts Tuesday. Activision already is a leader in console and PC video games, with franchises including “Call of Duty,” “Skylanders,” “Destiny” and “World of Warcraft.”
“We think now is the right time to enter mobile gaming in a meaningful way,” Kotick said. “Widespread mobile access around the world has opened up significant demand for engaging, fun content that players can enjoy anytime, anywhere.”
The mobile games market is worth $36 billion, but it’s “extremely fragmented,” Kotick said. Other major players include Supercell, Machine Zone, Rovio, Glu Mobile (NASDAQ:GLUU), Electronic Arts (NASDAQ:EA) and Zynga (NASDAQ:ZNGA).
“Acquiring King will solidify Activision Blizzard’s position as the world leader in interactive entertainment, positioning the combined company for growth across platforms, audiences, genres and business models,” Kotick said.
The acquisition is a “creative, tax-efficient way to use its offshore cash as it enters the fast-growing mobile gaming market in earnest,” Jefferies analyst Brian Pitz said in a research report Tuesday. King’s sales, however, are declining as its “Candy Crush” franchise matures and as it faces the “daunting task” of trying to replicate that success, Pitz said.
King’s revenue has fallen on a year-over-year basis for four straight quarters, and earnings per share have dropped in three of those four quarters.
King is scheduled to report third-quarter earnings after the market close Wednesday. Analysts polled by Thomson Reuters expect King to earn 37 cents a share excluding items, down 34% from the year-earlier quarter, on sales of $455 million, down 13%.
Activision Earnings Rise
Meanwhile, Activision reported Q3 earnings Monday that soundly beat Wall Street’s estimates.
Activision earned 21 cents a share excluding items on sales of $1.04 billion in the September quarter. Analysts were looking for EPS of 15 cents on sales of $950 million. On a year-over-year basis, Activision’s earnings per share rose 9%, and sales fell 11%.
Analysts are divided on whether Activision got a bargain or overpaid for King.
Cowen analyst Doug Creutz called the acquisition “an absolute steal for Activision.” The purchase “immediately vaults them to being one of the top mobile gaming companies in the world.”
The timing of the sale is puzzling, because King is on the cusp of launching another “Candy Crush” sequel and has three more games in regional testing, including “Farm Heroes,” its second-biggest franchise, Creutz said.
“Success by these games could have returned the company to a top-line growth profile, which we think would have reaped benefits for King shares, given the company’s inherently high profitability,” Creutz said. “We can only surmise that perhaps the management team and key investors were tired of being spurned by the market as a public company and wanted to be able to totally focus on game creation.”
Mike Wade, a professor at the IMD business school of Switzerland, said Activision’s purchase price overvalues King. “To me, this sounds very expensive,” he said in a note.
Activision’s purchase of King could pave the way for more mergers and acquisitions in the gaming sector, Mizuho Securities analyst Neil Doshi said in a report. He noted that Take-Two Interactive Software (NASDAQ:TTWO), with $1 billion in cash on hand, could be a buyer.
Evercore ISI analyst Mike Swierczek agreed. Large media conglomerates such as Walt Disney (NYSE:DIS) and Time Warner (NYSE:TWX) could be potential acquirers of mobile games companies, he said in a report.
Activision stock was up 7% in afternoon trading, near 37. Glu Mobile stock was up 4.6%, and Zynga added 3%, on speculation that they could be acquisition targets.
