How Might Tencent's Investment Affect Activision?
Last summer, shortly after it was announced that Tencent had purchased a minority stake in Epic, I wrote about the trend of Asian investment in western game companies, stating my opinion that it would continue even though there weren't very many obvious targets in play. At the time, we knew Vivendi's majority position in Activision Blizzard was available, but with the market value of its shares in the $8 billion range, it wasn't going to be an easy acquisition to fund.
On Friday, we learned that CEO Bobby Kotick figured out a way. Vivendi will sell 49 percent of its current 61 percent holding, receiving $8.2 billion. Most of this amount will be from Activision itself, roughly $1.2 billion from the $4.5 billion it has in cash and investments plus $4.75 billion to be raised by issuing new debt (the company has none right now). The rest, another $2.34 billion, will come from an investment group pulled together by Kotick and Co-Chairman Brian Kelly. Those two are apparently “only” kicking in $50 million each, which means the other partners are funding almost 96% of the latter sub-total.
I couldn't help but be intrigued when I saw that said group includes China-based Tencent, which will be, according to Reuters' report on the deal, a passive investor, meaning it will not have a seat on Activision's board. Nonetheless, considering only one other participant was named, Fidelity Investments, it seems reasonable to think that Tencent's commitment is in excess of $1 billion. Frankly, it's rather difficult to imagine any company putting up that kind of money, then being completely satisfied to sit back and not exercise any degree of influence.
While it's still premature to predict with any real level of confidence what Tencent's impact may be, speculating is a different matter. In this respect, a couple of possibilities do come to mind. One of these was the general topic area of a recent column. Obviously, the company now looks like a pretty solid bet to operate Titan in China. Despite the use of the word “subscribers”, World of Warcraft isn't primarily a flat monthly fee offering there. So why not wield some influence in order to make the new title capable of employing F2P there as well as in other markets where it's the prevalent model?
Speaking of WoW, I've been of the opinion for some time that it will convert, probably on a regional basis rather than everywhere all at once. While Tencent's becoming a major investor in Activision doesn't specifically indicate this will happen for China, it clearly doesn't lower the probability. What's more, if the shift takes place there, it only makes sense to follow suit in the rest of the Far East, the Russian-speaking countries, etc. Should that occur, it seems only a matter of time for North America and Western Europe too.
Will Tencent have sufficient clout to bring about something like this? Since I've seen no real indication either way, I can't rule it out. One thought in this regard is that the deal's structure may put a greater degree of control or power into its hands than just looking at the dollars may suggest, even without a seat on the board, which likely wouldn't be difficult to change anyway. It seems safe to assume that any directors named by the investment group will support its interests. Of its two large stakeholders, Fidelity has no apparent agenda related to the game industry. Accordingly, how often will it have strong reasons to stand in the way of changes that its Chinese partner truly wants?
In addition, there's the matter of Tencent's further intentions. I said last year that although it didn't have enough cash on hand to fund a straightforward purchase of Vivendi's entire block of shares, “There are other ways.” Accordingly, I'm now curious as to whether this might be the first step toward acquiring more of Activision with the eventual goal of accumulating enough to exercise effective control.
As I noted, the above is pure speculation on my part. That said, it's all based on what I think could happen without excessively stretching the bounds of credibility, not on what I want or don't want to take place. There are definitely other possible and arguably more probable scenarios, so I'm very interested to see how this situation will play out over the next few years, and whether it will further accelerate Asian investment in western game companies.
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