Power Up: Analysts React To Activision Blizzard's Acquisition Of Candy Crush-Maker King Digital

• Activision Blizzard, Inc. ATVI announced on Monday it's wholly owned subsidiary, ABS Partners, will acquire King Digital Entertainment plc KING for $18 per share.
• The deal represents an approximate 20 percent premium to King's closing price on Friday.
• Wall Street analysts were mixed following the announcement.

Activision Blizzard announced on Monday that ABS Partners, a fully owned subsidiary of Activision, will acquire all of the outstanding shares of King Digital, the maker of Candy Crush, for $18 per share. The deal represents a 20 percent premium over Friday's closing price, a 26 percent premium over King's enterprise value (excluding net cash), a 23 percent premium over King's one month volume weighted average price per share and a 27 percent premium over King's three month volume weighted average price per share. The agreement has been unanimously approved by the boards of directors of both firms but still remains subject to approval by King's shareholders and the relevant government regulators. Here is a summary of what Wall Street's top analysts are saying following the announcement. Piper Jaffray: Activision ‘Hungry For Candy' Michael Olson of Piper Jaffray commented in a note that Activision's acquisition of King makes it a "major player" in mobile as King consistently holds two of the top five highest-grossing mobile titles in the US – Candy Crush and Candy Crush Soda. Olson continued that the even though King's revenue has been in decline, the company still has a "very clean model," including an estimated 2015 EBITDA margin of 38 percent, no debt and nearly $800 million (or $2.48 per share) in net cash as of the end of the second quarter. The analyst also noted that the combined entity will now consist of two of the top five highest-grossing mobile games, one of the top console franchise (Call of Duty), and one of the largest PC franchises (World of Warcraft). Finally, Olson stated that while the acquisition won't provide Activision with overwhelming opportunity for synergies or cross-selling, the company's "leadership" and operational efficiency are "qualities that can enable King to be run with less volatility and enhanced profitability." Shares of Activision remain Overweight rated with an unchanged $38 price target. Shares of King were Neutral rated with a $16 price target before the acquisition announcement. Mizuho: ‘Somewhat Cautious' On The Deal Neil Doshi of Mizuho Securities commented in a note that he was "surprised" by the announcement and highlighted four key points: 1) private company valuations may have been "out of reach" but King's purchase price of around 6x EV/EBITDA was "reasonable," 2) Activision is taking on risk with the acquired asset as free-to-play and casual mobile game performances can be "highly unpredictable," 3) the transaction "fills a void" in Activision's casual/mobile game segment, and 4) the acquisition could "pave the way" for more M&A in the space. Doshi continued that he is "somewhat cautious" on the deal as Activision has shown a history of staying away from "hype" and "overly valued" social games over the past five years. The analyst is questioning what drove management to make an acquisition outside of its core console, PC, and online gaming offerings. Finally, Doshi is unsure "what type of risk" will be added to Activision's business model from the transaction. Shares of Activision remain Buy rated with an unchanged $31 price target. Credit Suisse: Acquisition To Accelerate Transition To Online Stephen Ju of Credit Suisse commented in a note that he has previously believed that videogames continue moving away from console and retail-drive distribution to online and a "more direct billing relationship" between the publisher and consumer. With that said, Ju agrees with the "strategic rationale" of Activision's acquisition which should accelerate its transformation into being a "better e-commerce merchant of digital merchandise." Shares of Activision remain Outperform rated with an unchanged $38 price target. Jefferies: Tax Efficient Use Of Offshore Cash Brian Pitz of Jefferies commented in a note that Activision's acquisition of King represents a "creative" and tax efficient way to use its offshore cash. According to Pitz, it "probably made sense" for Activision to pursue an acquisition rather than repatriate its offshore cash given a low probability of a tax-holiday. The analyst also stated that the acquisition gives Activision access to the "fast-growing" mobile gaming space. Pitz also pointed out that the combined entity will result in one of the largest entertainment companies in the world with over half a billion monthly active users in 196 countries. On the other hand, Pitz suggested that the deal will come with a "heavy dose" of skepticism from investors given the large deal size and the fact that King's revenue is mostly concentrated around a single game (Candy Crush) which saw a 28 percent year over year decline in revenue during the second quarter. Shares of Activision remain Buy rated with an unchanged $33 price target.