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I AGREE
02 Nov 2015
Approximately $4.1 billion ($6.4 billion pro forma for King acquisition) of rated debt affected
New York, November 02, 2015 -- Moody's Investors Service upgraded Activision Blizzard, Inc.'s
("Activision Blizzard") senior unsecured notes rating to Baa3 from Ba2,
upgraded the company's senior secured credit facilities to Baa2 from Baa3,
and withdrew the company's Ba1 Corporate Family Rating and Ba1-PD
probability of default rating. The upgrade reflects Activision
Blizzard's leading position in the growing and fragmented gaming
industry, strong diversification across multiple genres and gaming
platforms, and strong track record of developing profitable and
sustainable franchises with international appeal. The upgrade occurs
at the same time the company has announced its agreement to acquire King
Digital Entertainment plc ("King") for nearly $5.9
billion, with a combination of cash on hand and debt financing.
We do not expect the transaction to have a material effect on Activision
Blizzard's credit metrics as approximately 60% of the acquisition
will be funded with cash on hand and we anticipate that the company will
reduce debt quickly over the next two years. The outlook is stable.
Activision Blizzard intends to acquire all of the outstanding shares of
King for $18.00 cash per share for cash consideration of
$5.7 billion and $0.2 billion of rollover
unvested equity awards. The company intends to finance the transaction
with $3.4 billion of offshore cash on hand and with proceeds
from a new $2.3 billion term loan. The transaction
is expected to close by March 2016 pending King shareholder approval and
various international and domestic regulatory approvals.
Issuer: Activision Blizzard, Inc.
Upgraded:
....Senior Secured $250 million Revolving
Credit Facility due 2018 (undrawn as of 9/30/2015): Upgraded to
Baa2 from Baa3 (LGD2)
....Senior Secured $2,500 million
Term Loan B due 2020 (roughly $1.9 billion outstanding as
of 9/30/2015): Upgraded to Baa2 from Baa3 (LGD2)
.$1,500 million 5.625% Senior
Notes due 2021: Upgraded to Baa3 from Ba2 (LGD5)
.$750 million 6.125% Senior Notes
due 2023: Upgraded to Baa3 from Ba2 (LGD5)
Outlook Actions:
....Outlook, changed to Stable from
Positive
Withdrawn:
.Corporate Family Rating (CFR): Withdrawn Ba1 rating
.Probability of Default Rating (PD): Withdrawn Ba1-PD
rating
.Speculative Grade Liquidity Rating (SGL): Withdrawn
SGL-1 rating
RATINGS RATIONALE
Activision Blizzard's upgrade to a Baa3 senior unsecured rating
reflects its leading position in the growing and fragmented gaming industry,
strong diversification across multiple genres and gaming platforms,
and strong track record of developing profitable and sustainable franchises
with international appeal. The ratings and stable outlook take
into account our expectation that management has the ability to make strategic
investments to create new intellectual franchise properties to replace
aging ones which face the potential risk of decline over time, and
leveraging existing ones across various platforms.
Activision Blizzard's expected acquisition of King, creators
of the popular mobile game franchise Candy Crush, increases scale
and cash flow, increases the amount of monthly active users ("MAUs")
to roughly 547 million as of October 2015, creates potential for
cross-promotion of games across platforms, and expands the
company into the fast growing mobile market, particularly in international
markets. Moody's notes that at around the time of expected
closing of the King transaction, leverage will likely rise to around
3.2x due to normal volatility due to differing annual release cycles,
but we believe that Activision Blizzard is well positioned to improve
credit metrics pro forma for the King transaction as it applies excess
cash to rapidly deleverage by the end of FY2016 to between 2.8x
and 2.5x debt-to-EBITDA. A continued commitment
from management to sustain credit metrics commensurate with an investment-grade
rating will be important to maintain the investment grade rating.
company's rating is moderately constrained by revenue concentration among
key titles and the risk of failing to predict changing consumer preferences.
Although the company is able to generate meaningful recurring revenue,
there is significant exposure to concentration risk in its largest franchises,
which is why development of new potential franchises like Destiny and
Heroes of the Storm is important. Revenues associated with Activision
Blizzard's top 3 franchises, Call of Duty (originally released
in 2003), World of Warcraft (2004), and Skylanders (2011),
accounted for 67% of consolidated net revenues for the 2014 fiscal
year and a significantly higher portion of operating income. The
King acquisition will reduce concentration as a percentage of total revenues
and King's Candy franchise will become the second largest revenue
generator after Call of Duty.
Offsetting this risk is Activision Blizzard's ability to sustain
the popularity of franchises more than 11 years old and to continuously
develop new, profitable, and award-winning franchises.
Risks associated with the expected King acquisition include franchise
concentration with approximately 43% (for the last twelve months
ended June 30, 2015) of total gross bookings coming from their most
popular game, Candy Crush Saga. These risks are compounded
by King's recent MAU declines, primarily associated with Candy
Crush Saga. King has diversified its game offerings and must continue
to do so to offset declines in older games. "We believe that King's
games possess high risk as compared to those of Activision Blizzard,
given their short franchise history and lower level of game immersion,"
stated Neil Begley, a Moody's Senior Vice President. However,
the acquisition catapults the company into the rapidly growing mobile
platform where it did not have a significant presence, and King's
network could provide avenues for cross pollination to create new mobile
games. "Despite the risk associated with the King games,
we believe that Activision Blizzard has demonstrated well its franchise
creation capabilities and it generates significant free cash flow which
could be used to reduce debt to offset any unexpected decline in King
game revenues in order to sustain its investment grade ratings,"
added Begley.
The business risks are balanced with moderate and improving leverage,
excellent liquidity, strong management oversight, and fiscal
discipline with a focus on operating margins and free cash flow generation.
The company is able to engage and transact with its loyal user base through
multiple platforms, as well as its own Battle.net online
platform for Blizzard games, providing it reliable insight into
consumer preferences and visibility into the success of future releases.
Furthermore, Moody's expects that international penetration,
particularly in regions like China, continued strategic partnerships
with other companies such as with Bungie (creators of the hit franchise
Halo) and Tencent Holdings Limited (A2 stable), and improvements
to broadband services worldwide, will help boost the company's audience
reach and diversify revenue streams further.
We have notched the secured bank facility ratings up from the Baa3 senior
unsecured notes rating to Baa2 due to the present existence of security.
The upnotching is due to our anticipation that the Term Loan B will be
repaid within the next two years and we expect that all outstanding funded
debt will become unsecured, pari passu, and the ratings unified
at Baa3.
Upward pressure on the ratings could occur in the case of a material increase
in business diversity through the development of new, successful,
long-lived franchises that results in more stable, recurring,
and predictable revenue and cash flow and increasing domestically available
cash balances without decreasing total cash balances, along with
leverage sustained under 2.25x (incorporating Moody's standard
adjustments). Liquidity would also need to remain excellent.
Downward pressure on the ratings could occur if the company's liquidity
position becomes pressured due to degradation of its existing game customer
base and inability to replace weakening franchises with new ones,
leverage is expected to be sustained over 3.00x (with Moody's standard
adjustments), or a material shift in the direction of the company
that does not balance the interests of debt holders with equity holders
and that increases credit risk.
The principal methodology used in this rating was Business and Consumer
Service Industry published in December 2014. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
Activision Blizzard, Inc., based in Santa Monica,
CA, is a global game developer and publisher. Its franchises
include Call of Duty, Destiny, Diablo, World of Warcraft,
Hearthstone, Guitar Hero and Skylanders.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades Activision Blizzard to Investment Grade; Senior Unsecured Notes raised to Baa3
No Related Data.
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