ATVI Activision Blizzard Inc

By Sarah E. Needleman 

Activision Blizzard Inc.'s planned purchase of King Digital Entertainment PLC transforms it into a leader in mobile apps, a cutthroat and fast-growing segment of the videogame industry.

The question is whether Activision can help King churn out mobile games at the same pace and with the same success as it does for its own franchise PC and consoles games such as "Call of Duty," which launches yet another sequel Friday.

The proposed $5.9 billion deal would add King's games--among the top-grossing apps in the Apple Inc. and Google Inc. ecosystems--to Activision's stable of hit franchises, which helped the company report third-quarter earnings that beat Wall Street's forecasts.

Investors on Tuesday sent shares of Activision up 3.6% to $35.82.

Activision has only a handful of titles in the increasingly competitive mobile market, including "Hearthstone: Heroes of Warcraft," a free game for iOS and Android devices. Activision credited the game with helping it increase adjusted digital revenue to $697 million, a record.

While a strong early showing, the deal for King makes Activision an immediate leader in a market where gamers' spending is expected to reach $40 billion by 2019, according to IHS Global.

Activision expects the deal to be accretive to 2016 adjusted revenue by about 30%. Still, there is no guarantee it will maintain a mobile stronghold, nor that the deal will give King an umbrella to hide under, since it will continue to operate independently.

King faces formidable rivals in Supercell Oy and Machine Zone Inc., whose few cash-cow games barely budge from atop the top-grossing app charts.

"Candy Crush" is still intensely profitable, but the market is getting crowded. Hundreds of new, free games are added to app stores every day and only a fraction of mobile gamers make any in-game purchases. Tuesday, King said it had 474 million monthly active users in its third quarter, down from 495 million a year ago.

Rival Zynga, meanwhile, swung to a third-quarter profit but offered a soft outlook Tuesday for the holiday quarter.

"The market hates the mobile-gaming industry," said Doug Cruetz, a senior analyst at Cowen Group, explaining the attractive price Activision paid for King. The $18 a share is a 20% premium to King's 4 p.m. ET price on the New York Stock Exchange on Oct. 30, but still less than where King traded at the end of a tough first day of trading in March 2014.

Activision's counter will be a massive network of gamers. Combined, the two companies will boast a total active monthly user base of nearly 550 million people--a key metric in today's online gaming universe, where publishers look to generate recurring revenue.

The companies will also benefit from cross-promoting content, a strategy King has used since 2013 in lieu of intrusive banner and video ads. King, whose user base skews toward casual, female gamers, gains access to Activision's die-hard gamers.

Another advantage: Activision's trove of classic games like "Kaboom!" and "Pitfall!"

"With mobile, we now have the opportunity to reach new players," Activision Chief Executive Bobby Kotick said on an earnings call with analysts. The company can now "take a lot of that great content that we built over 35 years and create new content."

Mr. Kotick has a good track record of making lucrative deals, analysts say. Shareholders were skeptical about Activision's deal with Blizzard, said Ben Schachter, an analyst with Macquarie Securities. But Blizzard franchises such as "StarCraft" still have strong fan bases today.

"It takes a lot longer than people think" for games to reach a critical number of users and then decline, Mr. Schachter said. "You can generate a lot of cash until in between."

Write to Sarah E. Needleman at sarah.needleman@wsj.com

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(END) Dow Jones Newswires

November 03, 2015 17:35 ET (22:35 GMT)

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