Combined company called Activision Blizzard

The makers of “Guitar Hero” and “World of Warcraft” are joining forces to create the world’s biggest vidgame publisher.

In a deal that shocked the biz, Activision and Vivendi Games announced on Sunday that they will merge.

The combined company will be called Activision Blizzard, a reference to Vivendi’s most valuable asset, its “World of Warcraft”-publishing subsid Blizzard. The new entity is valued at $18.9 billion and is projected to have approximately $3.8 billion of revenue this year. That would make it the world’s largest pure-play videogame publisher, slightly ahead of current No. 1 Electronic Arts.

As structured, Activision is essentially buying Vivendi Games from parent company Vivendi for $8.1 billion worth of stock. The French conglom will then pay $1.7 billion in cash to achieve a controlling 52% stake in Activision Blizzard, which will be publicly traded.

Once the deal closes, which is expected to occur in the first half of 2008, Activision Blizzard will launch a $4 billion share repurchase offer that could raise Vivendi’s stake as high as 68%.

Though insiders said the deal has been in the works since early this year, the announcement caught the biz by surprise.

It’s easily the largest transaction the videogame industry has ever seen. Most recent acquisitions have been big publishers buying smaller players, such as EA’s recent purchase of developer Bioware/Pandemic for $860 million and Activision’s $100 million deal for “Guitar Hero” publisher RedOctane last year.

“I’ve never heard this even speculated, but it’s a merging of two companies that have different businesses and revenue streams and are almost entirely complementary,” noted Wedbush Morgan vidgames analyst Michael Pachter.

Santa Monica-based Activision, typically the No. 2 publisher in sales behind EA, is best known for franchises including “Call of Duty,” and “Guitar Hero,” as well as licensed games based on DreamWorks Animation toons and “Transformers.”

The addition of “World of Warcraft” gives it immediate dominance in the market of massively multiplayer online games, where it currently has no presence. The publisher also hopes to take advantage of the work Vivendi Games has done to launch “Warcraft” in China and South Korea to bring some of its titles to those markets.

Activision management will largely run the company day to day, led by CEO Bobby Kotick, who will assume the same role at Activision Blizzard. The industry vet is now catapulted to a position arguably equal with EA topper John Riccitiello as one of the most powerful execs in interactive entertainment. In an interview Sunday, he said he’s particularly hopeful that Activision Blizzard will be a leader in expanding vidgames beyond the core young male demo.

“With the success of the Wii and what we have had with products like ‘Guitar Hero’ you are really, for the first time, starting to see a broadening of the audience,” Kotick told Daily Variety. “We are now the best positioned combination of interactive assets to capitalize on the change in audience that’s taking place.”

Vivendi Games, meanwhile, gets a much stronger slate of titles to balance out “Warcraft.” Though the publisher has a few console properties like “Spyro” and “Crash Bandicoot,” as well as licenses for “Scarface,” Robert Ludlum books and “Ghostbusters,” its non-“Warcraft” lineup is relatively small.

The deal marks a stepped-up commitment to the biz for Vivendi, which in 2004 unsuccessfully tried to sell its vidgame unit after General Electric didn’t buy it along with Universal Studios. Since then, however, Vivendi Games has prospered due almost exclusively to “World of Warcraft,” which launched that same year and now has more than 9 million players. Thanks to its monthly subscription model, it is widely believed to be the industry’s most profitable property, with margins of more than 50%.

In the first nine month of this year, Vivendi Games’ revenue was up 50%, which the company credited mostly to growth in “Warcraft.”

“When we had billions of dollars in debt to repay for our shareholders, we were thinking differently,” Vivendi topper Jean-Bernard Levy said of the shift in attitude. “Since then, our commitment to the videogame business has been very strong. Now we have found a great match in Activision and are investing even more money and will be active, supportive, long-term shareholders in this venture.”

In many ways, the deal marks the ascension of Irvine-based Blizzard Entertainment to the pinnacle of the vidgame biz, with its name now atop the industry’s biggest publisher. Founded in 1991 and acquired by Vivendi in 1998, it was a successful but far from dominant development studio until “World of Warcraft” came out in 2004.

“One of the most compelling reasons for this structure it to unlock the value within Blizzard, which I don’t think is reflected in the Vivendi share price,” said Blizzard topper Mike Morhaime, who will continue to head his studio largely independently. “As a public company, we can unlock that value and use our share price to attract and retain talent.”

Vivendi Games chairman Rene Penisson will be chairman of Activision Blizzard. Current Vivendi Games CEO Bruce Hack will become vice chairman and chief corporate officer, in charge of the merger integration and all finance, HR and legal functions. Activision publishing prexy Mike Griffith will retain his role and also oversee all of Vivendi’s non-Blizzard games.

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