Activision Blizzard released its latest earnings report last night, but that’s not the big story today. Wall Street is more focused on the other big announcement that came with it. The company has signed an agreement to Candy Crush maker King Digital in a deal worth $5.9 billion in equity value at $18 per share. The transaction is expected to close in Spring 2016.
Activision, King in heavy trading volume
Shares of King Digital soared in very high trading volume today, climbing by as much as 14.83% to $17.85 per share. As of 12:56 p.m. Eastern, more than 55 million shares of King had changed hands, compared to the average daily volume of 1.04 million shares.
Activision Blizzard shares were also much more active than usual, with about 26.5 million shares having changed hands at around the same time, compared to the average daily volume of 8.1 million shares. Activision shares climbed by as much as 7.19% to $37.06 per share during regular trading hours today.
Is King Digital a good buy for Activision?
One of Activision Blizzard’s weakest areas has been mobile, and with the acquisition of King Digital, it makes an important move into this area. Jefferies analysts Brian Pitz and Brian Fitzgerald, who have a Buy rating and $33 per share price target on Activision, say the acquisition gives the company a “creative, tax efficient way to use its offshore cash.”
They think it’s a logical move to make an acquisition rather than repatriate the cash because it seems unlikely that U.S. lawmakers will set a tax holiday anytime soon. Also they note that it fills the huge gap that currently exists in Activision’s lineup by giving it a foothold in the mobile gaming space as King is one of the biggest players in the mobile market. Also the success of Candy Crush makes King look like an attractive choice. After the combination, the company will have more than half a billion active players in 196 countries, making it one of the world’s biggest entertainment companies.
Why it may not be such a great move for Activision
However, the Jefferies team also notes that King’s bookings have been declining successfully and that the company has been attempting to replicate the success it has had with Candy Crush Saga, which remains popular but is declining. King’s revenue is almost entirely focused on Candy Crush, which made up 39% of the company’s total second quarter revenues at $207 million in bookings. That marked a 28% decline from last year’s second quarter bookings of $361 million for the game. At in last year’s second quarter, Candy Crush made up 59% of King’s total revenue.
As a result, Pitz and Fitzgerald expected “a heavy dose of skepticism from investors” on the deal, especially because of its large size, which represents a 20% premium from King’s closing stock price on Oct. 30.
Risk in the King acquisition
Mizuho Securities analysts Neil Doshi and San Phan were a bit surprised by the deal and are cautious on it. They note that Activision has stayed away from social gaming until now, instead focusing on PC, online, and console games. They wonder why Activision decided to buy King because it’s outside of its “typical wheelhouse of games,” which target “hard-and-mid-core gamers.” They’re also wondering what kind of risk the company will be taking on.
They see King Digital as a risky asset because of the unpredictability of free-to-play and casual mobile games. However, they also think the merger of Activision and King might result in more consolidation in the gaming space, noting that Take Two Interactive has $1 billion in cash it might wish to dispose of.
Oh yeah… and Activision Blizzard also beat estimates
Last night Activision Blizzard posted solid earnings results with non-GAAP revenue falling 11% to $1.04 billion, although that was enough to beat the consensus estimate of $952 million and management’s guide of $930 million. Non-GAAP earnings were 17 cents per share, beating the consensus of 16 cents and the guidance of 14 cents per share.
The company’s World of Warcraft franchise stabilized and ended the quarter with 5.5 million subscribers, although that was down slightly from the previous quarter’s 5.6 million subscribers. Destiny also had solid numbers with 25 million gamers playing an average of three hours every day. Activision is also looking forward to the launch of Call of Duty: Black Ops III, which comes out on Friday.
The company’s guidance was disappointing, however, as management projects $2.15 billion in revenue for the fourth quarter, which comes up short of the Wall Street estimate of $2.24 billion. They expect non-GAAP earnings of 82 cents per share, again coming up short of the consensus at 89 cents per share. It should be noted, however, that Activision Blizzard has a history of conservative guidance and did not increase the full year guidance to account for the third quarter beat.