Reports Say Vivendi to Take $2 Billion From Activision
It looks like Activision Blizzard’s plan to whether any unexpected costs for the upcoming console launches and possible sales shortfalls as a result of economic uncertainty by leveraging a mountain of money may require a rethink.
A report in the Wall Street Journal suggests that Activision’s parent company Vivendi is planning to take a $2 billion cash dividend from the publisher to pay down its own debt.
The $2 billion dividend on its own wouldn’t be terrible because Activision reported cash and cash equivalents of $4.3 billion on its March 31, 2013, first quarter report. If that was all that needed to be paid, it wouldn’t be an issue.
However, Vivendi owns 61% of Activision Blizzard’s common shares per the Q1 2013 Investor Summary. If Vivendi is to get $2 billion paid as a dividend, a dividend has to be declared for all shareholders. An examination of the unaudited balance sheet at March 31, 2013, indicates that only common shares are authorized and outstanding at the financial statement date.
So in order for Vivendi to get its $2 billion payment, Activision would have to declare and pay a dividend of over $3.2 billion to its shareholders. My calculation came out to about $3,278,688,525 in total or about $2.935 per share based on the number of outstanding shares at March 31st.
It just gets worse from there. Approximately 58% of Activision’s cash and investments are held outside the US which will be taxed upon re-entering America. I’m not familiar with America’s tax code but in trying to expedite the repayment of its debt, it would seem that Vivendi is going to pick Activision clean.
When you look at the balance sheet at the end of the first quarter, liquidity ratios after this payment should worry investors, including Vivendi. Even if the dividend is only $3.3 billion after tax, the acid test ratio falls to about 0.82:1 as quick assets (cash, investments and accounts receivable) would be about $1.56 billion against $1.9 billion of current liabilities. The rule of thumb is that the acid test ratio should be at least 1:1. In other words, Vivendi’s dividend risks leaving Activision short on cash to pay some of its bills.
So while other developers are trying to insulate themselves from risk, Vivendi is leaving Activision out to dry. The money that Activision had to protect themselves from the risk of a game being a bust is about to vanish. If Call of Duty: Ghosts isn’t a sales dynamo, Activision could find themselves in some serious financial hot water.