Vivendi Deal to Form a Video Game Empire

Matt Richtel and Eric Pfanner - International Herald Tribune

Vivendi, the French media and entertainment conglomerate, said Sunday that it planned to acquire a controlling stake in the U.S. video game publisher Activision in a deal aimed at taking advantage of booming video game markets like South Korea and China.

Under the agreement, which values Activision at $18.9 billion, Vivendi would combine its game division with Activision, creating the largest video game company in the world that is not owned by a maker of game consoles.

Vivendi and Activision executives said that by combining the two game businesses, they could help Activision, which has developed popular games for consoles like the Sony PlayStation 3 and Microsoft's Xbox 360, move more strongly into online "massively multiplayer" games, which have legions of devoted fans in Asia and elsewhere.

Vivendi has specialized in multiplayer games like "World of Warcraft," which has more than nine million players worldwide, including millions of paying subscribers in China and South Korea, making them some of the only successful Western entertainment exports in a region ravaged by piracy.

Activision, meanwhile, publishes the skateboarding game "Tony Hawke," the war game "Call of Duty" and one of the industry's current best sellers, "Guitar Hero," which allows people to strum along on a plastic guitar to tunes played on the television.

"This positions us better to take advantage of opportunities wherever they occur, whether that's in casual gaming or massively mulitplayer games, anywhere in the world," said Robert Kotick, chief executive of Activision, who will remain as chief executive of the combined game businesses.

Vivendi and Activision said that with $3.8 billion in revenue this year, the combined company would be larger than Electronic Arts, the largest independent game publisher today, with revenue of $3.1 billion. The two companies said they expected operating income for the new company of $1.1 billion by 2009.

The agreement values Activision shares at $27.50 each, a 24 percent premium over the close Friday of $22.15.

Under the arrangement, Vivendi will fold its games operations, valued at $8.1 billion, into Activision and pay Activision shareholders $1.7 billion in cash. That will give Vivendi 52 percent ownership of the new company, to be called Activision Blizzard; Blizzard Entertainment is the name of Vivendi's most successful game studio.

Vivendi plans to raise its stake to 68 percent through a $4 billion cash tender offer for additional Activision Blizzard shares. Though the new entity will continue to trade publicly on the Nasdaq Stock Market, Jean-Bernard Levy, the chief executive of Vivendi, said it did not mean that Vivendi was pulling back from the video game industry.

"We obviously remain very committed to this business," Levy said.

Levy said the combined company would look for other acquisition opportunities in the game industry, which remains fragmented, with large publishers like Activision and Electronic Arts working with hundreds of game development studios around the world.

"This isn't the end of the game," Levy said.

Activision already has a partnership with a Vivendi division, Universal Music Group, providing music for the game "Guitar Hero." Kotick said that while there might be other opportunities to take advantage of Vivendi content in video games, the main benefits of combining the two companies would be on the distribution side.

Even as the deal puts Activision Blizzard in the top spot in terms of revenue, the question that will face investors is whether Activision can duplicate the business model of Electronic Arts.

EA has built its business on creating numerous game franchises that deliver reliable streams of annual revenue. For instance, in its fiscal 2007, EA had 24 titles that sold more than one million copies each, and four games - "Madden NFL 07," "Need for Speed Carbon," "FIFA 07" and "The Sims 2 Pets" - that sold more than five million copies.

The video game software industry is booming, and is poised for a record year, driven by the recent introduction of the PlayStation 3, Nintendo Wii, and Xbox 360 game consoles. But the industry also depends on companies creating hits, and being able to sustain them.

Activision, based in Santa Monica, California, has been an industry darling of late, in large part because of the popularity of "Guitar Hero III," which was introduced on Oct. 28 and sold 1.3 million copies within seven days. Through October, Activision has three of the eight best-selling games in the United States this year, according to NPD Group, which compiles sales data.

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Eric Pfanner reported from London.

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Copyright 2012 by International Herald Tribune