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King Digital acquired by Activision

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Video game giant Activision Blizzard announced Monday night an agreement to buy mobile gaming company King Digital Entertainment for USD 5.9 billion.

The acquisition significantly raises Activision Blizzard’s stature in the fast-growing mobile gaming industry, which is expected to reach worldwide revenue of USD 45 billion in 2018 at 15% annual growth, according to investment bank Digi-Capital.

The “Call of Duty” and “World of Warcraft” maker is getting the No. 4 mobile game company by app revenue, as of September data from tracking firm AppAnnie. King’s two hits, “Candy Crush Saga” and “Candy Crush Soda Saga,” were among the six most-downloaded game apps across the world in September, the firm said. The puzzle games involve matching virtual candies on a jumbled grid to score points. The games are free, but players may purchase special features to help them along.

Acquiring King’s more than 474 million players pushes Activision past 500 million players who turn on a game at least once a month, a “bigger user base than anything beside YouTube and Facebook and one of the very few entertainment networks of that scale,” Activision Blizzard Chief Executive Bobby Kotick said in an interview.

King, whose games are popular mostly with women, also brings a new audience to male-and-hardcore-gamer-dominated Activision Blizzard. “We now have male and female gamers, spanning 196 countries, casual and hardcore,” Kotick said. “We love the idea of adding millions of females to our audience.

Activision Blizzard has been a force in console and computer games but hadn’t moved as aggressively into smartphone and tablet games as some rivals and upstarts. Still, it’s found a hit in mobile card game “Hearthstone” and generated strong digital revenue elsewhere. Shares of Activision are up more than 70% this year, a top performer on Wall Street.

Discussions about a possible deal began in April, though Kotick said King executives were reluctant to lose independence and had no reason to sell. “But when they saw what the combined network would do, to be able to reach audiences around the world, I think they found there would be more opportunity to express themselves creatively and commercially,” Kotick said.

But analysts have wondered whether King can generate sales off new games fast enough to make up falling revenue from existing titles, and large shareholders could have been antsy to pocket gains while they could. “King was unlikely to replicate the massive success of ‘Candy Crush Saga’ at its peak, so the merger provides the best case scenario for investors,Patrick Walker, vice president of insights at video game industry consultancy EEDAR, said in an email.

Activision Blizzard plans to use USD 3.6 billion in cash stored offshore and a USD 2.3-billion bank loan to pay USD 18 per share for King. That’s a discount over the $22.50 share price that the Dublin, Ireland, company offered when it went public in March 2014. Shares of King closed at USD 15.54 in Monday’s trading on the New York Stock Exchange, valuing the company at USD 4.8 billion.

Activision Blizzard’s cash offer is attractive given the balance of future opportunities, risks and competitive forces confronting King’s business,” Gerhard Florin, chairman of King’s board of directors, said in a prepared statement.

King reported USD 155 million in adjusted profit in the second quarter on USD 500 million in adjusted revenue, down 18% and 16%, respectively, from the same period a year ago. Kotick said after reviewing what games are in the works, he’s confident that there’s “nothing but great future opportunity.”

Activision, which on Monday night reported USD 990 million in a third quarter sales, said the addition will bolster revenue next year by 30%. King, which has 1,600 employees, will become a stand-alone operating division, alongside Activision Publishing, Blizzard Entertainment and a newly announced but yet-to-be named esports division. King co-founder Riccardo Zacconi will remain its CEO.

Looking at current analyst estimates, King is expected to earn EPS of USD 1.85 2015 and USD 1.65 2016. This implies a PE-ratio of 9.7x and 11x respectively at the takeover price of USD 18 per share. That basically says it all as to how attractive an investment in the mobile gaming sector is. Not to forget that King is one of the absolute top players in the industry.

Nordic Investor

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