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ATVI » Topics » Thank you, Bobby. This is a tremendously exciting and financially compelling transaction, and as Bobby and Jean-Bernard have said, this will create the largest, most profitable publisher in the sector, with a platform that should continue to deliver superThis excerpt taken from the ATVI DEFA14A filed Dec 5, 2007. Thank you, Bobby. This is a tremendously exciting and financially compelling transaction, and as Bobby and Jean-Bernard have said, this will create the largest, most profitable publisher in the sector, with a platform that should continue to deliver superior shareholder returns, as we have for the last 15 years.
Let me walk you through the structure of the transaction. As a first step, upon closing, Vivendi will contribute Vivendi Games, valued at $8.1 billion, along with $1.7 billion of cash. In exchange, Vivendi will receive 358 million shares of Activision at a price of $27.50. This represents a premium of 31% over Activision’s past 20-day average closing price and gives Vivendi a 52% ownership share in the new Company.
At this point, the Company will have 686 million fully diluted shares outstanding, which at the deal price of $27.50 represents a combined market cap of $18.9 billion. As a second step, within five days post closing, the new Company will launch a $4 billion tender offer to acquire about 146.5 million shares at a price of $27.50 per share. This represents a tender for about 50% of Activision’s current outstanding shares and if the tender is fully subscribed would bring Vivendi’s ownership stake to 68%.
The tender offer will be funded by three tranches of cash. The first line of funding will come from the new Company’s cash on hand at closing, including the $1.7 billion initial contribution from Vivendi. Second, Vivendi will fund another $700 million in exchange for an additional 25.5 million primary shares. And then, if necessary, the remainder will come from newly issued debt from Activision Blizzard. After the tender, the debt is not expected to exceed $800 million. If fully subscribed, the post-tender offer, fully diluted share count would be about 565 million shares.
So, in summary, we believe the structure of this transaction is very well designed, because it provides shareholders with an opportunity to participate in the future growth of Activision Blizzard, the new leader in interactive entertainment. Or, if they so choose, take a 31% cash premium for a large part of their stake in Activision.
While this transaction is compelling from so many perspectives, the ability to instantly translate the Vivendi assets into a superior return for our shareholders was the principal driver. We are valuing the Vivendi Games assets at $8.1 billion. However, the valuation is really driven by Blizzard Entertainment, because we know that the worst-case scenario for the rest of the business is breakeven operating results.
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Blizzard is expected to generate $517 million in operating income, excluding equity-based compensation in calendar 2007. The $8.1 billion valuation therefore implies an EBIT multiple of 15.6 times, which compares very favorably to the average industry multiples. And Blizzard, as the industry-leading platform for high-margin entertainment, should easily command a premium.
While unlocking Blizzard’s value is an important component of this transaction, there are numerous other benefits likely to result in significant increases in shareholder value. Jean-Bernard and Bobby have already laid out the compelling strategic case. I will take you through the key financial building blocks that underpin the earnings power of the combined Company and why we are confident in our EPS outlook of more than $1.20 for calendar year 2009.
Beginning in 2008, we will switch to a calendar fiscal year to align our year end with that of Vivendi’s. Calendar 2008 will be a transition [sub] year during which we will focus on maintaining the strong momentum on the base business while integrating and positioning the new company for an even bigger year in 2009.
In 2009, we expect to deliver pro forma operating margins in excess of 25%, generating $1.1 billion in operating income on a revenue base of about $4.3 billion. This would result in EPS in excess of $1.20 per share, which just to reiterate is on a non-GAAP basis. Our assumptions are based on modest revenue growth of about 14% for Activision Blizzard over the next two years, combined with three to four points of margin expansion from the pro forma 2007 operating margin of 18.6%.
Margin expansion will be driven by operating leverage and synergies. The second building block, which should add another three to four points of margin expansion, is improving the operating performance of the Sierra division. Vivendi has made significant investments in Sierra’s product and intellectual property pipeline.
We have made relatively conservative assumptions, since it includes many unproven but promising properties and based on our track record of maximizing profitability, we are very confident and committed to eliminate operating losses and low-margin product lines by 2009. The combined margin expansion plan includes about $50 million to $100 million in cost synergies, which we expect to generate also by 2009.
To obtain these synergies, we expect one-time restructuring costs of as much as $100 million in calendar 2008. So, in summary, this combination creates the largest, most profitable pure-play Company in the sector with pro forma 2007 operating income of about $700 million, which is more than double the nearest competitor. 2007 pro forma combined operating income margin is estimated at 18.6%, again, more than two times that of the nearest competitor.
And by growing operating income by more than 50% over the next two years, we expect to further extend our competitive advantage and deliver superior returns for our shareholders, as we’ve consistently done over many years. So in terms of next steps, we will proceed with the necessary filings for the Activision shareholder vote, which requires approval of over 50% of shareholders. We will seek regulatory and antitrust approvals and expect the closing of the transaction to occur during the first half of 2008.
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