Activision Stock Deal Allowed to Proceed by Court

Activision Blizzard Inc., the largest U.S. video-game publisher, may proceed with a $5.83 billion share buyback and the management-led purchase of $2.34 billion in company stock, a Delaware court ruled.

The Delaware Supreme Court issued its oral ruling following arguments yesterday, sending Activision shares up 4.7 percent. Activision had appealed Delaware Chancery Court Judge J. Travis Laster’s Sept. 18 decision that it must hold a shareholder vote on the sale of the $8.2 billion in stock -- all of it by parent Vivendi SA.

“There is no reasonable possibility of success on the merits,” Chief Justice Myron Steele wrote for the court in a one-page order. “The stock purchase agreement here contested is not a merger, business combination or similar transaction.”

The court’s decision ensures independence for Activision, the largest U.S. video-game company, through the $8.2 billion transaction announced in July and led by Chief Executive Officer Bobby Kotick. Activision will use cash and take on debt to purchase shares held by Vivendi for $13.60 each, or $5.83 billion. Kotick and his partners, who include co-Chairman Brian Kelly, Chinese video-game publisher Tencent Holdings Ltd., Davis Advisors and Leonard Green & Partners, will pay $2.34 billion for about a 25 percent stake.

Activision rose 77 cents to $17.05 in New York yesterday, taking its gains this year to 61 percent. Vivendi added 1.1 percent to 18.34 euros at 9:24 a.m. in Paris.

Last Obstacle

The ruling clears what may be the last obstacle to the Activision buyback, which will put the games maker “in a position to be more financially flexible,” Michael Pachter, an analyst at Wedbush Securities in Los Angeles, wrote in a research note.

“The company communicates clearly, executes well, and its management appears to truly understand how to make money,” said Pachter, who has a “buy” rating on the shares and a target price of $22.

An Activision shareholder sued Sept. 11 in Chancery Court, arguing the transaction would allow Kotick’s and Kelly’s group to exercise control of the company. Lawyers for the shareholder alleged the stock-purchase agreement was a merger involving Activision and Vivendi and required approval by a majority vote of investors outside Vivendi.

‘Widespread Affirmation’

William Savitt, an attorney for Activision, countered yesterday that the transaction creates future value for shareholders.

“This transaction has received widespread affirmation from every corner of the market,” Savitt told the five justices at the hearing in Dover. “There is no reason to think this wouldn’t be widely approved by any faction of shareholders.”

Plaintiff attorney Michael Hanrahan said that shareholders, and not market reception, should decide what’s in their best interest.

“It’s a huge transaction,” he said. “$5.83 billion is flowing out of Activision to a controlling stockholder.”

Hanrahan declined to comment on the ruling.

Completion of the deal would end five years of control by the French media and telecommunications company and give Kotick the freedom to pursue overseas expansion or new digital ventures without oversight. Activision, the maker of “Call of Duty” and “Skylanders,” has increased revenue every year since Vivendi purchased a controlling stake, yet it hasn’t actively pursued new digital ventures with the same fervor as Electronic Arts Inc. and Take-Two Interactive Software Inc., two of its largest competitors.

Reduce Stake

Last year, Vivendi canvassed possible buyers for its 61 percent Activision stake. Microsoft Corp. and Walt Disney Co. were among those that demurred, people with knowledge of the matter said at the time. Kotick and his buyout group finally struck a deal after Activision shares rose enough to allow Vivendi to get cash, while Activision still was able to buy out the stock at a discount.

The sale would reduce Vivendi’s stake to 12 percent and make the investor group the largest shareholder, with 25 percent of the stock. Vivendi plans to complete the sale of the stake on or about Oct. 15, the company said in an e-mail.

Justices asked numerous questions yesterday about the structure of the deal, how it differed from a business combination and its value to shareholders.

‘Good Deal’

“There is almost universal belief that this is a good deal for the stockholders,” Steele said.

Justices took issue with Laster’s conversion of a temporary restraining order to a more punitive preliminary injunction. The customary length of a restraining order is 10 days to maintain the status quo in a case after a lawsuit has been filed, Steele said.

“Should they have anticipated the vice chancellor would do that?” Steele asked Hanrahan. “While you thought you were brought to a knife fight, it’s actually a gunfight at the end of the day.”

In his Sept. 18 ruling, Laster told lawyers that Activision was barred from proceeding with the transactions until there was either a trial on the merits, receipt of a favorable stockholder vote or modification of an injunction by the court.

‘Zero Notice’

Had Laster issued only a temporary restraining order, the parties would have been in court in about a week, Justice Jack B. Jacobs said.

Activision “had zero notice of the conversion,” Savitt said.

“The vice chancellor said, ‘if you don’t like my ruling go to the Supreme Court,’” Savitt told the justices.

Activision’s minority shareholders stood to lose a total of $1 billion if the deal remained blocked, Edward P. Welch, an attorney for the company, said in a Sept. 30 court filing.

Debra Dynabursky, an assistant to the chief public policy officer at Activision, didn’t return phone messages seeking comment on the ruling, nor did Cassandra Bujarski, a spokeswoman for Activision with Sard Verbinnen & Co.

The case is Hayes v. Activision, CA8885, Delaware Chancery Court (Wilmington). The Supreme Court case is Activision v. Hayes, 497,2013.

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