Activision: Game Over?

Activision, Inc. and Vivendi yesterday announced that they have signed a definitive agreement to combine Vivendi Games with Activision.  The transaction is structured as follows:

• Vivendi Games will be acquired by Activision via a reverse subsidiary merger. In the merger, Vivendi will receive 295.3 million new shares of Activision common stock.  The transaction implies a value of approximately $8.1 billion for Vivendi Games.
• Concurrently with the merger, Vivendi will purchase 62.9 million Activision shares at a price of $27.50 per share for a total of $1.7 billion in cash.
• Within five business days after closing the above transaction, Activision Blizzard (the newly renamed combined entity) will launch a $4 billion all-cash tender offer to purchase up to 146.5 million Activision Blizzard common shares at $27.50 per share.
• Vivendi will also acquire from Activision Blizzard additional newly issued shares for up to an additional $700 million of Activision common stock at $27.50 per share, the proceeds of which would also be used to fund the tender offer.

Upon consummation of all of these transactions, it is expected that Vivendi will own an approximate 68% ownership stake in Activision Blizzard on a fully diluted basis. The parties have yet to file all of the transaction documents with the SEC -- I'll have a full analysis once they are -- but there are already a number of issues raised, including:

1. Activision, a Delaware company, is selling control of the company to Vivendi.  As such, they are subject to Revlon duties and the board of Activision is now under the duty to obtain the highest price reasonably available for Activision.  It remains to be seen if any subsequent bidders will emerge, but if they do, the value of Blizzard and its strategic contribution will provide the Activision board some leeway in valuing alternative offers.  How much -- that is unknown. 
   Bottom-line:  Activision is now in play (get it?).   
2. If this deal is indeed completed, Vivendi will become a majority holder of Activision.  It will be interesting to see what protections the Activision board has negotiated for the minority shareholding position they are creating.  At a minimum, this should include a standstill, and possibly voting restrictions and restrictions on minority freeze-outs depending upon how hard the Activision board bargained. 
3. As with any acquisitions of private companies, valuing Vivendi Games it is quite hard and subject to criticism for under or more likely, over-valuation.  Expect there to be a fair bit of cirticism either way on the valuation assigned to Vivendi Games.  [Addendum:  See here Deal Journal's excellent post on this point]
4. In the same vein, the deal could get significantly delayed due to the significant time need to the prepare the proxy statement for this transaction.  Here, Vivendi Games is material to Activision-- full financial statements and MD&A must therefore prepared for Vivendi Games for inclusion in the Activision proxy-- Vivendi recently terminated its reporting obligations to the SEC, but presumably since it has been historically reporting in U.S. GAAP this should ease the preparation of these financials. 

Finally, for legal geeks, the press release contained the following boilerplate: 

This communication is being made in respect of the proposed business combination involving Activision, Vivendi and Vivendi Games. In connection with the proposed transactions, Activision plans to file with the SEC a Registration Statement on Form S-4 containing a Proxy Statement as well as other documents regarding the proposed transactions. The definitive Proxy Statement will be mailed to stockholders of Activision. INVESTORS AND SECURITY HOLDERS OF ACTIVISION ARE URGED TO READ THE REGISTRATION STATEMENT, PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTIONS.

I think this is a mistake.  Historically, the SEC has not permitted Form S-4 to be utilized to issue shares to a single shareholder in an agreed transaction as there is no offer to sell under Rule 145.  I suspect someone just shoved in the wrong boilerplate -- the transaction documents should contemplate solely a proxy statement and, possibly, a registration rights agreement for Vivendi's shares. 

Finaly note:  Vivendi's counsel was Gibson, Dunn & Crutcher LLP -- a coup for that firm.  Congratulations.