Activision / King – Is it a Good Deal or Bad?

Biggest quantitative takeaways:

– Total Addressable Market of Mobile Gaming: $36 billion
– TAM Size expected to reach $59 billion by 2019
– Accretive to EPS in FY2016 by incremental $0.50
– Call option on multiple new IP titles launching in 2016
– King valuation at 6.4x 2015E EBITDA vs. ATVI at 13.7x
– King operating margins at 36% vs. ATVI at 33%

The combined companies would have TTM revenue and EBITDA of $6.8B and $2.5B, respectively, making ATVI the leader in mobile gaming space. The combined company will also have over 500 million MAUs across 196 countries and strong wholly owned IP (not reliant on licenses). Transaction should accelerate ATVI online transformation and also give it a wider footprint across more devices.

So, is it a good deal or bad? In short, we believe capex and growth rates in mobile gaming will significantly outpace the growth rate in traditional game console category. Margins, networking, speed, graphics, interface and consumer appeal in mobile gaming is quickly approaching (or surpassing) level that will leave traditional game consoles in the dust over time.

Activision recognizes this sea change. We like the deal.

Here is 5-year ratio chart of Activision vs. Electronic Arts. Activision has been major underperformer but now we expect this to breakout and run.