What would you think if Activision suddenly announced an $9.6 billion special dividend

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You might that if Activision suddenly announced a major payoff, it was rewarding shareholders for supporting it as it built Call of Duty and Skylanders into two of the strongest franchises in the industry. (I leave out World of Warcraft because Activision bought that one).

You’d be wrong.

If there were to be a special dividend (and I don’t think there will be), it would be because of corporate shenanigans 6,000 miles away in Paris. Vivendi, the original owner of Blizzard which sold it to Activision and ended up with a 61% stake, is facing challenges. It has been doing so for over a decade, and I visited their offices to talk about strategy a number of times back when I was an investment banker. According to the FT (paper version, so no link), the company is in the process of exiting its “capital intensive telecom holdings to cut debt and regroup around its content assets, notably Universal Music.” Vivendi suffers from a conglomerate discount, when investors fail to give the company full value for all of its disparate holdings, believing them better to be apart than together. Worse than that, they (rightly) won’t give Vivendi credit for the $4.6 billion of net cash that sits on Activision’s balance sheet, even though Vivendi, in theory, owns 61% of it.

Earlier this week, a special clause in the deal between Vivendi and Activision, struck at the time of the acquisition, expired. That clause meant that Vivendi could not force Activision to have net debt of $400 million without the approval of Activision’s independent directors. Now, Vivendi can do so, and according to some analysts, says the FT, Vivendi could force Activision to raised $5 billion in debt. Add it to the $4.6 billion in cash and Activision could issue a special dividend of $9.6 billion, of which Vivendi would receive a cool $5.9 billion.

In practice, this is unlikely. It would leave Activision in a difficult position for future investment in intellectual property. It would sour the relationship between Vivendi and one of its more successful operating divisions. It would require banks to want to lend lots of money to Activision on good terms, and banks have been notoriously nervous about lending money to hit-driven industries than games. More likely is that Vivendi will use the threat of the leveraged dividend to push Activision into making a bid for the Vivendi shares itself, at a price above current market value. Time will tell.

But the important point of the story is this: if you were told that Activision had suddenly announced a special dividend, you might just think it was because it was being successful. But the truth would be larger forces were at work behind the scenes. In my experience, this is nearly always the case.

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