The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
After the market close on Wednesday, Activision Blizzard (NASDAQ:ATVI) announced a public offering of roughly 41.5 million shares by holder Vivendi. Activision Blizzard will not receive any of the proceeds from the offering, which is expected to close and settle on May 28. We do not currently expect Activision Blizzard to repurchase any of the shares offered by Vivendi. We note that at the end of Q1:14, Activision Blizzard had cash and cash equivalents of roughly $4.3 billion and debt of $4.3 billion.
The number of shares offered by Vivendi was in line with our expectations after reviewing the shelf registration statement filed by Activision Blizzard last month. Previously, in July 2013, Activision Blizzard announced that it would repurchase roughly 429 million shares from parent Vivendi.
In a simultaneous transaction, an investor group led by Activision Blizzard CEO Bobby Kotick and Board co-Chairman Brian Kelly would purchase an additional roughly 172 million shares from Vivendi. When the transactions were completed in October 2013, Vivendi still held an 83-million-share stake in Activision Blizzard.
Last month, Activision Blizzard filed a shelf registration statement for the sale of up to roughly 41.5 million shares by Vivendi, which represents 50 percent of its stake. Vivendi is not allowed to sell any of its stake for 15 months after the closing of the original transactions, with the exception being a three-month window following the six-month anniversary of the closing, which we estimate to be from April 11, 2014, to July 11, 2014.
In that window, Vivendi can sell the lesser of 50 percent of its stake (roughly 41.5 million shares, in line with today’s announcement), or 9 percent of the issued and outstanding shares of Activision Blizzard common stock on the date of the sale (we estimate that amount to be roughly 64 million shares based upon 715 million shares outstanding at April 29, 2014).
Maintaining our estimates for Activision Blizzard. Vivendi will be receiving the proceeds from the offering, and we do not currently expect Activision Blizzard to repurchase any of the shares being offered. As a result, the transaction is not expected to have any impact on Activision Blizzard’s balance sheet or share count, and as such, it will be not be accretive or dilutive to expected earnings.
Maintaining our OUTPERFORM and our 12-month price target of $30 per share. We value the shares at an above-market multiple of 20x our 2015E $1.50 pre share EPS, reflecting our view of the company’s outstanding execution and superior earnings growth.
Investment thesis: We believe Activision Blizzard is well positioned for further multiple expansion. The company’s Call of Duty sales (packaged goods and DLC) should rebound in 2014 as we fully transition to next-generation consoles; its Skylanders game and toy sales reached a cumulative $2 billion, withstood an onslaught from a competitive product, and appear positioned to maintain share this year; the number of World of Warcraft subs appears to have stabilized; Bungie’s Destiny (to be released in September) has solid preorders and is positioned to be a $1 billion franchise; and the company is seeing continued margin expansion from digital sales.
While some investors may have concerns about declines for the company’s core businesses, we remain fans of Activision Blizzard. We believe the company communicates clearly, executes well, and its management appears to truly understand how to make money. We are maintaining our OUTPERFORM rating and our 12-month price target of $30 per share. We recommend that investors accumulate shares of Activision Blizzard while they remain below our price target.
Risks to attainment of our share price target include changes to game release timing, greater-than-expected deterioration of the average selling price (ASP) for game software, the effects of competition, changes in macroeconomic factors, and lower-than-expected consumer demand for video game hardware.
Michael Pachter is an analyst at Wedbush Securities.