French multimedia conglomerate Vivendi is reportedly seeking buyers for its videogames business, Activision Blizzard. While BMI had expected Vivendi to take drastic action to lighten its substantial debt burden through the sale of one or more of its various business lines, we had considered the possibility that it would divest Activision Blizzard to be too extreme, given the considerable cross-selling opportunities presented by Vivendi's placement in the telecoms, pay-TV, music and video markets. Nevertheless, with online revenue falling sharply and Vivendi undergoing considerable structural reform, cashing out on this investment may actually be a sound strategic move for Vivendi.
Reuters reports that Vivendi is soliciting interest from a number of global investors - including some prominent games publishers - for its 61% stake in Activision Blizzard. It suggests the stake could fetch up to US$10bn, given that it owns the rights to popular multi-platform titles and brands such as Call Of Duty and World of Warcraft. Reuters identifies China-based Tencent, US media and cable operator Time Warner, global software company Microsoft and a number of private equity companies with well established media sector investment pedigrees.
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As BMI reported in late June, Vivendi has been under pressure for some time to streamline its sprawling business empire and focus on key areas of growth, including telecoms. The abrupt departure of the CEO, Jean-Bernard Levy, in late June signalled an opportunity for management to take heed of those calls and move quickly to restore investor confidence in the group ( see our online service 'Vivendi's Break-up Looks Increasingly Likely', June 29 2012). As we noted in that article, BMI believes that all options are on the table and that swift action would be in the group's best interests.
We also hold to our view that removing key elements from Vivendi's burgeoning multimedia business would be short-sighted as music, video and gaming are increasingly important to telecoms network operators and service providers controlled by Vivendi, including French multi-play operator SFR, Brazilian broadband operator GVT and Africa-focused Maroc Telecom. SFR, in particular, needs to leverage off popular Vivendi-owned content to help it differentiate itself from a plethora of service providers, including upstart newcomer Free Mobile. Selling Activision Blizzard - which is beginning to enter the mobile and online gaming markets - could therefore make it costlier for SFR to source that content in the future.
Nevertheless, Vivendi's Q112 results show that Activision Blizzard's performance is becoming less attractive to the debt-ridden group. Total Activision Blizzard revenue declined by 15.7% year-on-year (y-o-y) to EUR894mn in Q112, while EBITDA declined by 21.3% to EUR395mn. Retail revenue shrank by 6.7% y-o-y, while digital online revenue contracted by 32.3%.
China's Tencent already collaborates with Activision in offering the World of Warcraft online game to Chinese consumers, so there are some established links there. The Call of Duty franchise is also offered online. Each title has around 10mn subscribers. However, online subscription revenue - Activision Blizzard's largest source of income - shrank by 26.3% y-o-y in Q112 due to the delayed launch of some products and a tailing-off of interest in the latest additions to established franchises. As the company's other areas of activity are focused on consoles and handhelds - areas of the market that are not popular with Chinese consumers - BMI sees only limited interest from Tencent.
Microsoft offers the popular Xbox console and BMI sees considerable potential for the company to marry the hardware business with an existing and well-received games brand. Demand for consoles - and handhelds - is softening as consumers increasingly switch to mobile phones and tablets for their gaming needs. Sales of the Xbox are similarly softening and Microsoft could be induced to buy Activision as a means of reinvigorating interest in the console market. However, despite Microsoft's increased efforts to become an integrated provider of software and hardware, the fact that Activision's console-related revenue fell by 51.3% y-o-y in Q112, to just EUR134mn, suggests that buying Activision offers more risks than rewards for Microsoft over the medium to long term.
With other games publishers in a similar position to Activision, we do not envisage much interest coming from within the games industry. If Microsoft proves unwilling to take the risk, it may be left to the private equity sector to step in. Reuters names KKR, Providence Equity and the Blackstone Group as potential investors, but without the ability to leverage Vivendi's vast film, TV and music properties, they may place a comparatively low value on the business.