In one of the biggest acquisitions in the gaming industry this year, Activision Blizzard announced today that it is buying King Digital Entertainment for $18 per share, roughly $5.9 billion. That’s below the $22.50 share price at which King went public last year.
King Digital is best known as the maker of the hit game Candy Crush, but it also operates the Seattle gaming studio Z2. In February, King Digital gobbled up Z2 — maker of games such as Battle Nations and Metalstorm— for $150 million.
But the big prize here for Activision Blizzard is Candy Crush, which in the third quarter had a whopping 92 million daily active users. In total, King claimed that its games — including Pet Rescue, Bubble Witch and Farm Heroes — were played 1.4 billion times per day.
Riccardo Zacconi, CEO of King, said that they are looking forward to bringing their mobile gaming expertise to Activision Blizzard.
“We believe that the acquisition will position us very well for the next phase of our company’s evolution and will bring clear benefits to our players and employees,” said Zacconi in a statement. “We will combine our expertise in mobile and free-to-play with Activision Blizzard’s world-class brands and proven track record of building and sustaining the most successful franchises, to bring the best games in the world to millions of players worldwide.”
However, the fact that King sold at a discount compared to its IPO price indicates some of the challenges in the gaming business.
Peter Kakfa at Re/code notes that King had a tough time replicating the megahit success of Candy Crush. He writes in a piece called Candy, Crushed.
The thing about creating a megahit game in the iPhone/Android era is that there’s no flywheel effect: A megahit gives you resources to market other games, which is nice. But no one has been able to prove that making one megahit lets you make other megahits. Ask Rovio, the people behind Angry Birds.
King Digital was founded in Sweden in 2003, and it subsequently moved its headquarters to London. When it purchased Seattle-based Z2 earlier this year, that marked the company’s very first U.S. gaming studio.
At the time of the deal, Z2 employed about 100 in Seattle, while King employed roughly 1,200 worldwide.
Here’s the full press release on today’s deal:
SANTA MONICA, Calif. and LONDON–(BUSINESS WIRE)–Activision Blizzard, Inc. (“Activision Blizzard”) (Nasdaq:ATVI) and King Digital Entertainment plc (“King”) (NYSE: KING) today announced the signing of a definitive agreement under which ABS Partners C.V. (“ABS Partners”), a wholly owned subsidiary of Activision Blizzard, will acquire all of the outstanding shares of King for $18.00 in cash per share, for a total equity value of $5.9 billion (the “Acquisition”). The $18.00 per share purchase price implies a 20% premium over King’s 30 October 2015 closing price, a 26% premium over King’s 30 October 2015 enterprise value (which excludes net cash), a 23% premium over King’s one month volume weighted average price per share and a 27% premium over King’s three month volume weighted average price per share. The boards of directors of both Activision Blizzard and King unanimously approved the Acquisition, which is being implemented by means of a scheme of arrangement under Irish law. The Acquisition is subject to approval by King’s shareholders and the Irish High Court, clearances by the relevant antitrust authorities and other customary closing conditions, and it is currently expected that the Acquisition will be completed by Spring 2016.
Activision Blizzard believes that the addition of King’s highly-complementary business will position Activision Blizzard as a global leader in interactive entertainment across mobile, console and PC platforms, and positions the company for future growth. The combined company will have a world-class interactive entertainment portfolio of top-performing franchises, including two of the top five highest-grossing mobile games in the U.S. (Candy Crush Saga®, Candy Crush Soda Saga™), the world’s most successful console game franchise (Call of Duty®), and the world’s most successful personal computing franchise (World of Warcraft®), as well as such well known franchises as Blizzard Entertainment’s Hearthstone®: Heroes of Warcraft™, StarCraft®, and Diablo® and Activision Publishing’s Guitar Hero®, Skylanders® and Destiny, along with over 1,000 game titles in its library. Activision Blizzard expects that this leading content, together with expertise across subscription, upfront purchase, free-to-play and micro-transaction business models will enhance Activision Blizzard’s position as one of the world’s most successful interactive entertainment companies. During the last twelve months ended 30 September 2015, Activision Blizzard had non-GAAP revenues of $4.7 billion and King had adjusted revenues of $2.1 billion. During the same period Activision Blizzard had adjusted EBITDA of $1.6B and King had adjusted EBITDA of $0.9 billion. During the last twelve months ended 30 September 2015, Activision Blizzard had GAAP revenues of $4.9 billion and King had IFRS revenues of $2.1 billion. During the same period, Activision Blizzard had GAAP net income of $1.1 billion, and King had IFRS profit of $0.6 billion.
Bobby Kotick, Chief Executive Officer of Activision Blizzard, said, “The combined revenues and profits solidify our position as the largest, most profitable standalone company in interactive entertainment. With a combined global network of more than half a billion monthly active users, our potential to reach audiences around the world on the device of their choosing enables us to deliver great games to even bigger audiences than ever before.”
Kotick, added: “Riccardo, Sebastian, and Stephane are some of the best minds in the business, and we have long-admired King for consistently creating incredibly fun, deeply engaging free-to-play games that capture the imaginations of players across ages and demographics. Activision Blizzard will provide King with experience, support and investment to continue to build on their tremendous legacy and reach new potential. We share an unwavering commitment to attracting and developing the best talent in the business, and we are excited about what we will be able to accomplish together.”
Riccardo Zacconi, Chief Executive Officer of King, said, “We are excited to be entering into this Acquisition with Activision Blizzard. Since 2003, we have built one of the largest player networks on mobile and Facebook, with 474 million monthly active users in the third quarter 2015, and our talented team has created some of the most successful mobile game franchises. We believe that the Acquisition will position us very well for the next phase of our company’s evolution and will bring clear benefits to our players and employees. We will combine our expertise in mobile and free-to-play with Activision Blizzard’s world-class brands and proven track record of building and sustaining the most successful franchises, to bring the best games in the world to millions of players worldwide. We are very much looking forward to working with Activision Blizzard. We have two teams that, together, will have an amazing footprint, innovative technology, and leadership across platforms, and unique, established IPs to delight one of the largest networks of players in the world.”
Gerhard Florin, Chairman of King’s board of directors, said, “The Acquisition provides a return to King shareholders through the premium that it provides to King’s share price and the immediate liquidity that the Acquisition will provide to all of our shareholders upon completion. The King board of directors believes that Activision Blizzard’s cash offer is attractive given the balance of future opportunities, risks and competitive forces confronting King’s business.”
Activision Blizzard Strategic Rationale
Activision Blizzard believes that the following points will accelerate Activision Blizzard’s strategic growth plan:
- One of the Largest Global Entertainment Networks. This Acquisition will create one of the largest global entertainment networks with over half a billion combined monthly active users in 196 countries. This global audience will reach across casual and core gamers, female and male players, and developed and emerging markets throughout the world. Direct relationships with this large and diverse audience will extend Activision Blizzard’s reach, creating opportunities to cross-promote content and engage new players with Activision Blizzard’s franchises.
- A New Global Leader in Mobile Gaming. Through this Acquisition, Activision Blizzard will become a global leader in mobile gaming—the largest and fastest-growing area of interactive entertainment, that is expected to generate over $36 billion of revenue by the end of 2015 and grow cumulatively by over 50% from 2015 to 2019.
- Diverse Franchise Portfolio with Leadership Across Key Platforms and Genres. The combined company will have a portfolio encompassing 10 of the world’s most iconic interactive entertainment franchises with leading titles including two of the top five highest-grossing mobile games in the U.S. (Candy Crush Saga®, Candy Crush Soda Saga™), the world’s most successful console game franchise (Call of Duty®), and the world’s most successful personal computing franchise (World of Warcraft®), among others. This world-class collection of games spans genres and platforms, drives deep, year-round engagement, and is well-positioned for continued growth.
- Potential Cross-Network Growth Opportunities. Combining one of the largest mobile gaming communities with Activision Blizzard’s leading franchises creates potential opportunities to grow and cross-promote content to a diverse audience, while providing players more opportunities to engage with its content.
- Enhanced Capabilities Across Business Models. The combined company’s capabilities across subscription, upfront purchase, free-to-play and micro-transaction business models will accelerate diversification of Activision Blizzard’s revenue streams. This expertise across diverse monetization methods will lead to new opportunities to delight players and provide Activision Blizzard with key capabilities to meet evolving player preferences and reach new untapped audiences. The combined company will benefit from King’s leading mobile capabilities that can be applied across the portfolio from micro-transactions, game analytics and mobile marketing to increase digital revenues.
- The Most Profitable, Successful Standalone Interactive Entertainment Company in the World. During the last twelve months Activision Blizzard had non-GAAP revenues of $4.7 billion and King had adjusted revenues of $2.1 billion, and for the same period, adjusted EBITDA of $1.6 billion and $0.9 billion, respectively. The combined company will have further diversified and recurring revenues, cash flow generation, and long-term growth opportunities to propel future value creation for shareholders. Activision Blizzard believes the Acquisition will be accretive to 2016 estimated non-GAAP revenues and earnings per share by approximately 30% and significantly accretive to 2016 estimated free cash flow per share. Activision Blizzard expects the combined company to maintain a disciplined capital allocation policy and strong balance sheet.
- Experienced Management Team. King will continue to be led by Chief Executive Officer Riccardo Zacconi, Chief Creative Officer Sebastian Knutsson, and Chief Operating Officer Stephane Kurgan, all of whom have strong expertise and proven track records in mobile gaming and have entered into long-term employment contracts. It is Activision Blizzard’s intention that King will operate as an independent operating unit, with enhanced resources to support its industry-leading franchises. Activision Blizzard has a strong integration track record, and implementing the Acquisition as structured will minimize disruption and integration risk while maintaining the spirit of creative independence. The combination unites Activision Blizzard’s and King’s highly-complementary cultures, with aligned commitment to innovation, deep respect for the creative process, franchise focus, and emphasis on talent development.
Terms of the Acquisition
- Under the terms of the Acquisition, which has been unanimously approved by the boards of directors of both companies, King’s shareholders will receive $18.00 in cash per share comprising a total equity value of $5.9 billion and an enterprise value of $5.0 billion. The purchase price represents a 20% premium over King’s closing price on 30 October 2015, a 23% premium over King’s one month volume weighted average price per share, and a 27% premium over King’s three month volume weighted average price per share and implies a multiple of 6.4x King’s estimated 2015 adjusted EBITDA.
- The cash consideration payable by Activision Blizzard under the terms of the Acquisition will be funded from approximately US$3.6 billion of offshore cash on the balance sheet of the Activision Blizzard Group and by an incremental term loan committed by Bank of America Merrill Lynch and Goldman Sachs Bank USA, as incremental lenders, under Activision Blizzard’s existing credit agreement in the amount of US$2.3 billion.
- The King board of directors, who have been so advised by J.P. Morgan as to the financial terms of the Acquisition, consider the terms of the Acquisition to be fair and reasonable. In providing its advice to the King Directors, J.P. Morgan has taken into account the commercial assessments of the King Directors.
- Accordingly, the King Directors unanimously recommended that King’s shareholders vote in favour of the resolutions relating to the Acquisition at the relevant shareholder and scheme meetings.
- It is intended that the Acquisition will be implemented by means of a scheme of arrangement under Chapter 1 of Part 9 of the Irish Companies Act 2014 (the “Scheme”). It is intended that the scheme document, (the “Scheme Document”) containing the full terms and conditions of the Acquisition (including notices of the shareholder and scheme meetings), will be issued to King’s shareholders, and, for information only, to holders of King’s options and share awards, within 28 days of this Announcement, unless otherwise agreed with the Irish Takeover Panel. The Scheme Document will be made available by Activision Blizzard at activisionblizzard.acquisitionoffer.com and by King athttp://investor.king.com/acquisition.
- The Acquisition will be put to King’s shareholders at both a scheme meeting and a shareholder meeting. In order to become effective, the Scheme must be approved by a majority in number of the King’s shareholders voting at the scheme meeting, either in person or by proxy, representing at least 75% in value of the King shares voted in each relevant share class. In addition, a special resolution implementing the Scheme and approving the related reduction of share capital must be approved by the King shareholders representing at least 75% of votes cast at the shareholder meeting.
- The Acquisition, by means of a Scheme, is conditional, among other things, on the satisfaction or waiver of the conditions set out in Appendix I. The Scheme will also require the sanction of the Irish High Court. Subject to the satisfaction, or where relevant waiver, of all relevant conditions and the sanction of the Irish High Court, it is currently expected that the Scheme will become effective and the Acquisition will be completed by Spring 2016. An expected timetable of principal events will be included in the Scheme Document.
- If the Scheme becomes effective, it will be binding on all King shareholders, irrespective of whether or not they attended and/or voted at the court or shareholder meetings (and if they attended and voted, whether or not they voted in favour).
- Activision Blizzard and ABS Partners have received irrevocable undertakings from Messrs. Riccardo Zacconi, Stephane Kurgan, Sebastian Knutsson, being members of the King Board, that they will vote in favour of the matters and resolutions to be considered at the court and shareholder meetings in their capacity as shareholders (or, in the event that the Acquisition is implemented by way of a takeover offer on terms and conditions at least as favourable, in aggregate, as the Scheme, to accept the offer or procure acceptance of the offer) in respect of their entire beneficial holdings of King shares amounting to, in aggregate, 49,408,045 King shares, representing approximately 16% of the issued share capital of King on 30 October 2015 (being the last practicable date prior to the publication of this Announcement).
- In addition, Activision Blizzard and ABS Partners have received irrevocable undertakings from certain other King Shareholders, namely Bellaria Holding S.à r.l. and Mr. Thomas Hartwig, King’s Chief Technology Officer, that they will vote in favour of the matters and resolutions to be considered at the court and shareholder meetings (or, in the event that the Acquisition is implemented by way of a takeover offer on terms and conditions at least as favourable, in aggregate, as the Scheme, to accept the offer or procure acceptance of the offer) in respect of their entire beneficial holdings of King shares amounting to, in aggregate, 147,107,666 King shares, representing approximately 47% of the issued share capital of King on 30 October 2015 (being the last practicable date prior to the publication of this Announcement).
- In addition, Activision Blizzard and ABS Partners have received irrevocable undertakings from Messrs. Robert Miller, Marcus Jacobs, Tjodolf Sommestad and Nicholas Pointon and Ms. Frances Williams and Jill Kyne, being holders of linked shares, that in their capacity as holders of linked shares they will vote in favour of the matters and resolutions to be considered at the relevant class meetings relating to approval of the Scheme (or, in the event that the Acquisition is implemented by way of a takeover offer on terms and conditions at least as favourable, in aggregate, as the Scheme, to accept the offer or procure acceptance of the offer) in respect of their entire beneficial holdings of linked shares (as applicable) amounting to, in aggregate, 190,790 linked shares which, together with the commitments from Messrs. Zacconi and Kurgan referred to above (which amount to 2,077,080 linked shares, in aggregate), represents approximately 92% of the issued linked share capital on 30 October 2015 (being the last practicable date prior to the publication of this Announcement).
This summary should be read in conjunction with, and is subject to, the full text of the attached Announcement (including its appendices). The Acquisition is subject to the conditions set out in Appendix I to this Announcement and the further terms to be set out in the Scheme Document. The sources and bases of information contained in this Announcement are set out in Appendix II and Appendix V. Additional information is provided in Appendix III. Certain definitions and expressions used in this Announcement are set out in Appendix IV.
Conference Call, Webcast, Investor Presentation and Copy of Announcement
Activision Blizzard and King will host a conference call at 8:00 a.m. ET/New York time tomorrow, 3 November 2015, to review the Acquisition and host a question and answer session. To access the conference call, interested parties may dial 888-596-2572 (domestic callers) or 913-312-0653 (international callers). The Conference ID Number is 9960349. Participants can also listen to a live webcast of the call through the Investor Relations page of Activision Blizzard’s website atinvestor.activision.com. During the conference call and webcast, management will review a presentation summarizing the Acquisition, which can be accessed at investor.activision.com or at activisionblizzard.acquisitionoffer.com. A webcast replay will be available for the duration of the offer period at activisionblizzard.acquisitionoffer.com. Please call five minutes in advance to ensure that you are connected. Questions and answers will be taken only from participants on the conference call. For the webcast, please allow 15 minutes to register, download and install any necessary software.
Simultaneous with this Announcement, Activision Blizzard issued its third quarter 2015 results in a separate release. Activision Blizzard plans to address questions regarding its quarterly financial results during a separate portion of the conference call scheduled at 8:00 a.m. ET/New York time tomorrow, 3 November 2015. Activision Blizzard previously planned to issue its earnings following the close of the market tomorrow. The previously scheduled call following the markets close tomorrow has been cancelled.
King will announce third quarter 2015 results and hold its conference call for analysts and investors on 4 November 2015 as regularly scheduled.
A copy of the Announcement and the documents required to be published pursuant to the Irish Takeover Rules by Activision Blizzard will be made available by Activision Blizzard free of charge, subject to certain restrictions relating to persons in restricted jurisdictions, on activisionblizzard.acquisitionoffer.com by no later than 12 noon ET/New York time on 3 November 2015. King will also make the Announcement and the documents required to be published pursuant to the Irish Takeover Rules by King available on its website free of charge, subject to certain restrictions relating to persons in restricted jurisdictions, on http://investor.king.com/acquisition by no later than 12 noon ET/New York time on 3 November 2015.