Activision Blizzard, Inc.
Rating: Outperform
Price: $12.37
Raising our ‘Modern Warfare 2’ unit estimate to 12.5 million from 9.5 million. Checks indicate that preorder totals for Call of Duty: Modern Warfare 2 (MW2) are the highest ever. Our checks extrapolate to 12.5 million units of sell-in in Q4—an increase from our previous estimate of 9.5 million, which we set after E3. Preorders are typically solid indicators of overall success.
Continue reading >>
Expectations are still highly varied. Our conversations with the buy side, combined with the wide range of printed sell-side estimates, have made it clear that a formal consensus for Modern Warfare 2 does not yet exist. We have heard Q4 unit expectations ranging from 9 million to 16 million. While it is still early, we feel confident regarding the low end of this range, and we believe that expectations could still move higher into the game’s release.
‘Modern Warfare 2’ still the catalyst for near-term ATVI Outperformance. Last week, Activision delayed Blur, but reiterated its guidance. The company also set a very cautious tone in its press release, which seemed to hint that the company was not as optimistic as some of the printed above-guidance estimates. However, we are maintaining our above-guidance estimates because of Modern Warfare 2’s strength. We continue to believe ATVI will outperform into the release of Modern Warfare 2.
Detailed Discussion
Most Preordered Game of All Time Makes Up for ‘Blur’ Delay
Checks indicate that preorder totals for Call of Duty: Modern Warfare 2 (MW2) are the highest in history. Preorders are typically a solid indicator of overall success. Our checks extrapolate to 12.5 million units of sell-in in Q4—an increase from our previous estimate of 9.5 million, which we set after E3. We detail our thoughts, including estimate revisions, below. Note that our conversation of units sold equates to sell-in, upon which the company recognizes revenue.
First Iteration Sold 7 Million Copies in December Quarter
The previous Modern Warfare (2007) sold 7 million copies in its first two months, into an installed base of 28.2 million consoles. Every store we have spoken with said that preorders are outstripping the previous version of MW, which should be expected. The first game sold 7 million copies in its first quarter and has sold 13 million copies life to date. However, its quality “snuck up” on gamers and the company, giving the title an extended tail, especially given initial supply constraints at retail. We expect MW2’s sales to be much more front-end weighted.
The previous best selling game of this cycle, Grand Theft Auto IV, sold 11 million copies in its first two months, into 35 million consoles. MW2 preorders are tracking ahead of GTA IV and, at launch, the worldwide console installed base will be twice the size at approximately 70 million. The U.S. installed base will be approximately 30 million, versus 14.7 million for GTA IV.
First-Quarter Sell-In Totals (M)
Sources: Company reports, The NPD Group, Pacific Crest Securities
Expecting a Shorter Tail – ‘GTA’ vs. ‘MW’ Tail Comparisons (M)
N.B. – Totals are U.S. sell-through, according to The NPD Group, through each game’s first 15 months. GTA sales are PS2-only, for a consistent comparison. Sources: The NPD Group, Pacific Crest Securities
Raising ‘MW2’ Unit Estimate to 12.5 Million from 9.5 Million
We now expect MW2 to sell 12.5 million copies this holiday, up from our previous estimate of 9.5 million. We raised our estimate coming out of E3, but increasing pre-orders, especially after recent hardware price cuts and details on the game’s multiplayer mode, support a higher estimate. In addition, retailers are reporting that, as games have been delayed, preorders for other games have been rolled into MW2 at a very high rate. Our new estimate is near the high end of the published sell-side estimates for the game. This estimate does not include the Wii port of Call of Duty 4: Modern Warfare, which we have modeled at 600,000 units.
Wide Band of Expectations and No Formal Whisper
Considering our conversations with the buy side and referencing the wide range of printed sell-side estimates, it has become clear that a formal consensus for MW2 does not yet exist. We have heard Q4 unit expectations ranging from 9 million to 16 million. While it is still early, we feel confident regarding the low end of this range, and believe that expectations could still move higher into the game’s release.
Maintaining Our Above-Guidance Q4 Estimates
Last week, Activision delayed Blur, but reiterated overall guidance. We are maintaining our estimates to incorporate this delay, which equated to $80 million in revenue and less than $0.01 in EPS. We are also lowering our catalog estimate to $390 million from $500 million to incorporate continued slow industry sales. The company also set a very cautious tone in its press release—apparently a hint that the company was not as optimistic as some above-guidance estimates would suggest. However, we are maintaining our above-guidance estimates because of Modern Warfare 2’s strength.
Category: ATVI, Games | Tags: ATVI, Call of Duty - September 29th, 2009, 5:00am
=====================================
Event:
Activision announced it is delaying Blur, its first foray into the racing-genre. The game is now expected to come out in 2010
It reiterated its guidance for $4.05B and $0.63, but urged investors to be “cautious and prudent in evaluating the company’s forecasts”
Continue reading >>
Conclusion:
Negative. The delay is somewhat disappointing, but the more cautious tone surrounding its guidance is the biggest news
- The Street is as at $0.65 for 2010 and may move lower given the cautious tone. The company attributes the caution to the macro environment, but given its three significant game delays, it certainly deserves some of the blame
- We were expecting 1.75M units of Blur, or approximately $80M in sales. Given the amount of capitalized software and the marketing budget associated with the game, it was likely not going to contribute profit this calendar year
- Given the modest contribution of revenue and profit that we expected from Blur, we still believe Activision can hit our estimates for the holiday season. However the hope that it will post meaningful upside and come through the holiday unscathed is a distant memory
However, ATVI is trading at 18x our 2009 EPS estimate, which we believe already prices-in a lot of negative sentiment and limits downside from these levels, especially because we expect investor sentiment to improve as we go into the holiday
Background:
Blur was not setting up to be a hit and its delay is not a total disappointment. The game does not look terrible, but gamers are waiting for Forza (Oct.) and Gran Turismo (Mar.), the two big first-party simulation racing games that come out every few years. Activision said in the release that the delay was for more work on the online multiplayer, but the game could use more time in all facets for it to really stand out.
This is Bizarre’s first game for Activision since its acquisition in September 2007. Not yet releasing a game is a disappointment in relation to the acquisition as well as Activision’s hope to finally break into the racing genre.
Activision has had far more delays this year that usual. It also delayed StarCraft II and Singularity (its other new IP that was slated to launch this year). Historically Activision has delayed fewer games than its peers, a point that it often reminds investors of. It is difficult to tell if these three delays represent an internal change or more delays to come, but against Activision’s strong track record they are a disappointment. While a game can potentially do better when it is delayed, ongoing delays erode investors’ confidence in companies’ ability to hit forecasts.
Copyright (C) 2009 Pacific Crest Securities. All rights reserved.
Category: ATVI, Games | Tags: ATVI, game delay, racing - September 21st, 2009, 6:02am
=========================================
Event:
-We can confirm through our channel contacts that Nintendo will cut the price of the Wii this month to $199 from $249
-We are looking at the implications from the cut. Last week advertisements by Walmart, Target and Toys R Us showed a cut, so this will not be a total surprise
Continue reading >>
Conclusion:
Positive for the video game publishers and retailers. Net net, we do not expect the news of a Wii price cut to be a big driver of video game stocks near-term, but we expect it to be a contributor to a bottoming and potential improvement in sentiment
A price cut on the Wii has the potential to be more influential on the industry than the price cuts on the PS3 or the 360 for a few reasons:
- The Wii is hitting $199, which is a much more ‘mass-market’ price point than the fully-featured 360 and PS3
- The Wii is more popular and is already selling at a much faster rate
- It will help drive Nintendo software sales, which have been one of the primary drags on industry sales growth
- The 360 price cut was not a true price cut. It was just more box for the money
We estimate that the Wii price cut will drive October hardware sales up at least 50% versus September
- There is not a perfect historical price cut to compare to, but the first price cut of the PS2 and Xbox led to 150% to 200% increases (see charts below)
- For the Wii, a normalized September m/m hardware growth rate is 15% to 20% or 320K in the U.S. according to NPD. A 50% increase would lead to September Wii sales of 415K
- The Wii price cut will contribute to the improving trend in video game sales that we expect to result in improved sentiment in video games
The PS3 and 360 price cuts had little direct impact on video game stocks and the Wii cut likely won’t as well
- However, September NPD data will likely have the first year-over-year growth since February. The price cuts are a key driver of that growth
- While October has the potential to be another difficult month, we expect growth in Q4 and Q1
- The ongoing declines in the industry has crushed optimism and sentiment in the space, especially after some considered the space to be ‘recession proof’
-Evan
PS2 HW Sales M/M % Change
Sources: The NPD Group, Pacific Crest Securities
Xbox HW Sales M/M % Change
Sources: The NPD Group, Pacific Crest Securities
Wii HW Unit Sales
Sources: The NPD Group, Pacific Crest Securities
Category: Games | Tags: ATVI, ERTS, Nintendo, price cut, THQI, Wii - September 21st, 2009, 5:07am
August sales declined 15% year over year. NPD released August U.S. console and handheld videogame sell-through data (Aug. 2 through Aug. 29) last night after the market closed. Sales declined 15% year over year to $470 million versus our forecast for a 16% decline to $465 million, due mostly to catalog declines this year versus last. The top new titles were Madden NFL 10 followed by Batman: Arkham Asylum.
Continue reading >>
We still expect declines to end in September. As part of our August preview we conducted an initial round of checks and analysis on September’s NPD data, which will be released Oct. 15. Even with lower ongoing catalog sales, we expect sales to grow at least 10% due to several high-profile titles and console price cuts. Further, if potentially big games such as Halo 3: ODST and the music-genre games sell well, we could see materially higher growth. The industry has seen year-over-year declines in consecutive months since March, and sentiment has softened significantly since the declines began. A swing back into positive territory would likely be good for videogame stocks.
AB’s sell-through declined 12%. We had expected a 15% decline. Activision Blizzard Inc. (ATVI, $11.59, Outperform) in August released Wolfenstein, which sold only 89,000 units in 12 days versus our estimate of 125,000 units. Sales were mostly in line with our estimates, with slight upside coming from Call of Duty catalog sales. Activision last year benefited from significant volume of music titles—the main reason for its 12% decline this year. The bulk of its 2009 releases will begin to roll out starting in September; these include Guitar Hero 5 (released Sept. 1) and Marvel Ultimate Alliance 2; and Tony Hawk Ride, Blur, DJ Hero, Modern Warfare 2 and Band Hero in Q4.
EA’s sell-through declined 18%. We had expected a 20% decline. Electronic Arts Inc. (ERTS, $18.05, Outperform) released Madden NFL 10 and G.I. Joe in August. EA’s decline is due mostly to the Rock Band franchise, which sold very well last summer. Madden sold 1.9 million units in 16 days versus our estimate of 2.1 million units, down from 2.3 million last August in 19 days. This result mirrored the slow start for NCAA Football last month. Given this data and our new preliminary expectation for 600,000 units sold in September, we believe EA will ship between 3.8 million and 4.0 million units of the game. We have currently modeled flat shipments year over year at 4.5 million units in fiscal Q2 (Sept.). The miss equates to approximately $25 million in our title model. This makes us less optimistic about EA’s September quarter as the company will now need a good September sales figure to hit our forecast.
T2’s sell-through declined 42%. We had expected a 45% decline. Take-Two Interactive (TTWO, $11.15, Sector Perform) had no big new releases in August. Combined with slow catalog sales and the absence of GTA IV follow-on sales total sales declined 42% year over year. Take-Two has a relatively light release slate until October, when it will release Borderlands, GTA Chinatown PSP and GTA Episodes, among others.
THQ’s sell-through grew 16%. We had expected 5% growth. THQ Inc. (THQI, $5.89, Sector Perform) released Paws & Claws Pet Vet in August. In May and June, it released UFC 2009 and Red Faction: Guerrilla. UFC sold well, but THQ now suffers from a gap in its release slate and sales levels may be modest until the release of its annual WWE game in November.
Ubisoft’s sell-through declined 24%. We had expected a 20% decline. Ubisoft Entertainment (UBI.FR, €12.89, Outperform) had no new main releases in August. The reason for the year-over-year decline is lower catalog sales, which were bolstered last year by Assassin’s Creed. Ubisoft will resume releasing titles next month with Academy of Champions Soccer, Cloudy with a Chance of Meatballs and TMNT: Smash Up, followed by Assassin’s Creed 2, Avatar and Shaun White Snowboarding 2 in Q4, among others.
EA Memo Accurately Predicts ‘Madden’ Declines
Electronic Arts’ CEO yesterday released a memo to employees predicting August industry sales declines year over year and corresponding Madden sales declines. The memo was picked up by media outlets and spun with a very negative tone. However, after reading the memo, we find its tone and positioning much more positive than portrayed by the media. While it did accurately forecast disappointing sales of Madden, the memo also communicated a sense of optimism and confidence. While the NPD data is an incremental negative for EA given lackluster sales of Madden, we think the market read too much into the memo as the stock sold off yesterday.
August Title Sales vs. Expectations
Sources: The NPD Group, Pacific Crest Securities estimates
PS3/360 Gain Back Share from Wii Due to ‘Batman,’ ‘Madden’
Sources: The NPD Group, Pacific Crest Securities estimates
New Releases Beat Estimates to Drive Upside in August
Sources: The NPD Group, Pacific Crest Securities estimates
Information contained in this report from The NPD Group, Inc. and its affiliates is the proprietary and confidential property of NPD and was made available for publication herein by way of limited license from NPD. Such NPD data may not be republished.
Category: Games | Tags: ATVI, ERTS, NPD Review, THQI, TTWO, UBI.FR - September 11th, 2009, 5:32am
Event:
NPD just released August U.S. video game sales data
Conclusion:
Neutral. The NPD data was very close to our estimates for the industry and for each publisher.
For ERTS – Modest negative. Even though the company hit our forecast for total sales, Madden missed our forecast by approximately 200K units. The 360 and PS3 beat our forecast. The Wii, PSP and PS2 missed our forecast. Units missed our forecast by 11%. Dollars missed our forecast by 7%. On a year over year basis Madden units are down 19% and dollars are down 18.3%.
Continue reading >>
Details:
Industry:
-15% to $470M vs. est. -16% to $465M
Batman: 520K vs. 550K
Activision:
-12% vs. est. -15%
Wolfenstein: 89K vs. est. 125K
Electronic Arts:
-18% vs. est. -20%
Madden: 1.9M vs. est. 2.1M
NCAA FB: 147K vs. est. 150K
Take-Two:
-42% vs. est. -45%
THQ:
+16% vs. est. +5%
Ubisoft:
-24% vs. est. -20%
Not rated:
Nintendo: -11% (no est.)
Wii Sports Resort: 754K vs. est. 650K
Category: Games | Tags: ATVI, ERTS, NPD, THQI, TTWO, UBI.FR - September 10th, 2009, 1:54pm
Event:
Bloomberg is reporting that ERTS CEO John Riccitiello sent an internal memo today to employees that says August industry sales were down for the industry and Madden “was also down with that trend”
Riccitiello: “It is discouraging that one of our highest-rated and best-marketed ‘Madden’ titles in years is facing strong headwinds”
See article for more detail
Show details >>
Conclusion:
Modest negative. The Street is already expecting a meaningful decline in August industry sales of approximately 15% Y/Y. Expectations for Madden are for down 5-10%. If Madden sales are down the same “trend” as the industry Madden could disappoint versus expectations. However, it is a little vague to pin down the exact number. It is definitely a change of tone from the Company, which has been more bullish on Madden in previous comments
Video game publishers and retailers receive the NPD data early and Riccitiello likely has advanced knowledge of the results and wanted to brace his employees for another sour month
However, from the Street’s perspective, it should not be much of a surprise that the industry and Madden were down in August. As we previewed yesterday:
We are expecting August industry sales to decline 16% year-over-year and we do not believe the Street will be surprised by another down month
We expect Madden sales to decline 9%. The decline is partially attributable to the game being in the market for 3 fewer days this August
We have spoken to the company, which is doing investor meetings at an investor conference today, but is not doing a public presentation. They did not refute the commentary from the memo. They are not giving a formal update to their expectations on Madden at the conference
We are not ready to change our estimates based on this commentary
Our position on ERTS remains that it should be able to reiterate its $1 EPS target for F2010, which will make stock trade up at these levels. We see a $23 fair-value based on our $0.95 F2010 EPS estimate. We are not in love with ERTS and its slate is nothing to write home about, but believe expectations are sufficiently low.
Category: ERTS, Games | Tags: ERTS, Madden, NPD - September 10th, 2009, 10:36am
Category: Games - September 10th, 2009, 7:34am
August sales likely declined 16% year over year. NPD will release August U.S. console and handheld videogame sell-through data (Aug. 2 through Aug. 29) after the market closes on Thursday, Sept. 10. We estimate that sales declined 16% year over year to $465 million due mostly to catalog declines this year versus last. The top new title this year should be Madden NFL 10 followed by Batman: Arkham Asylum.
Show details >>
Declines should finally end in September. We have done an initial round of checks and analysis on September’s NPD data, which will be released on Oct. 15. Even with lower ongoing catalog sales, we expect sales to grow at least 10% due to several high-profile titles and console price cuts, and if potential big games like Halo: ODST and the music genre games sell well, we could potentially see materially higher growth. The industry has seen year-over-year declines in consecutive months since March, and sentiment has softened significantly since the declines began. Swinging back into positive territory will likely be good for videogame stocks.
AB’s sell-through should decline 15%. Activision Blizzard Inc. (ATVI, $11.94, Outperform) released Wolfenstein in August. We have estimated 125,000 units in 12 days. Last year Activision benefited from significant volume of music titles, which is the main reason for its 15% decline this year. Activision lowered expectations for its Q3 with guidance last month, so expectations remain low for August data. The bulk of its 2009 releases will begin to roll out starting in September, including Guitar Hero 5 (released Sept. 1) and Marvel Ultimate Alliance 2, continuing in Q4 with Tony Hawk Ride, Blur, DJ Hero, Modern Warfare 2 and Band Hero.
EA’s sell-through should decline 20%. Electronic Arts Inc. (ERTS, $18.93, Outperform) released Madden NFL 10 and G.I. Joe in August. EA’s decline is due mostly to the Rock Band franchise, which sold very well last summer. We estimate Madden sales of 2.1 million units in 16 days, down from 2.3 million last August in 19 days. From our retail checks, we believe that the game is tracking flat to slightly down versus last year, depending on the retailer. With a slightly slower start, two fewer platforms (Xbox and DS) and three fewer days this year, our estimate is for a single-digit year-over-year decline in its first month of sales. However, with better reviews, fewer first-month days and the recent hardware price cuts, we believe September month-over-month declines will be modestly better than they have historically. We have modeled flat shipments year over year at 4.5 million units in
fiscal
Q2 (Sept.).
T2’s sell-through should decline 45%. Take-Two Interactive (TTWO, $10.87, Sector Perform) had no big new releases in August. Combined with slow catalog sales and the absence of GTA IV follow-on sales we estimate total sales down 45% year over year. Take-Two has a relatively light release slate until October, when it will release Borderlands, GTA Chinatown PSP and GTA Episodes, among others.
THQ’s sell-through should grow 5%. THQ Inc. (THQI, $5.89, Sector Perform) released Paws & Claws Pet Vet in August. In May and June, it released UFC 2009 and Red Faction: Guerrilla. UFC sold well, but THQ now suffers from a gap in its release slate and sales levels may be modest until the release of its annual WWE game in November.
Ubisoft’s sell-through should decline 20%. Ubisoft Entertainment (UBI.FR, €13.08, Outperform) had no new main releases in August. The reason for the expected year-over-year decline is lower catalog sales, which were bolstered last year by Assassin’s Creed. Ubisoft will resume releasing titles next month with Academy of Champions Soccer, Cloudy with a Chance of Meatballs and TMNT: Smash Up. Its more core-focused 4Q09 titles include Assassin’s Creed 2, Avatar and Shaun White Snowboarding 2, among others.
Select August Industry Releases
Sources: The NPD Group, GameSpot, Pacific Crest Securities
September Title Lineup Is Solid
Sources: The NPD Group, GameSpot, Pacific Crest Securities estimates
Information contained in this report from The NPD Group, Inc. and its affiliates is the proprietary and confidential property of NPD and was made available for publication herein by way of limited license from NPD. Such NPD data may not be republished.
Category: Games | Tags: ATVI, ERTS, NPD Preview, THQI, TTWO, UBI.FR - September 9th, 2009, 5:19am
Shanda Interactive Entertainment Limited
Rating: Outperform
Price: $50.99
Q2 EPS is much better than expected. Shanda reported Q2 revenue and EPS of $181.1 million and $0.90 versus our estimates of $180.7 million and $0.81. The EPS beat came from lower-than-expected costs of goods and development expenses. Shanda’s tax rate was also lower than expected, but it would have beat without that.
Show details >>
‘AION’ fears seem overblown as MMO growth rolls on. After the frenzy of positive AION sentiment ended abruptly, the success of the game became investors’ greatest fear. While Shanda did not break out its results exactly, we believe AION was the source of Q2 growth and better-than-expected Q3 guidance.
Other revenue was responsible for the upside. It is timely that Shanda’s other revenue outperformed because it is the chunk of revenue that constitutes Shanda’s nongame assets. Against increasing skepticism that Shanda can ever build this business into a significant revenue contributor, it appears to have gained traction, although it still contributes a small slice of Shanda’s overall revenue.
This is a good entry point in SNDA. SNDA has settled after skepticism around the release of AION and the spinoff of Shanda Games, which presents an attractive entry point. We continue to believe that the company is one of the best-positioned operators in the China online games sector.
Detailed Discussion
Q2 Beat Came from Other Revenue
Shanda Interactive reported Q2 revenue and EPS of $181.1 million and $0.90 versus our estimates of $180.7 million and $0.81. The EPS beat came from lower costs of goods and development expenses relative to our estimates as well as a lower tax rate, which were partially offset by higher S&M and G&A expenses. Shanda also benefited from a government incentive payment in the quarter, but when combined with investment income, the total was not significantly higher than our estimates. In total, the difference from these two items relative to our estimates amounted to $0.02 per share.
Reported Earnings
Sources: Company reports, Pacific Crest Securities estimates
‘AION’ Fears Seem Overblown as MMO Growth Rolls On
Massively multiplayer online game revenue was RMB 1,074.7 million versus our estimate of RMB 1,085.0 million, which was essentially in line. Monthly active paying accounts (APA) were better than we expected at 8.58 million versus our estimate of 7.48 million. However, average revenue per user (ARPU) of RMB 41.7 was below our forecast of RMB 44.2. Shanda attributed the solid growth in users, but offset in ARPU, to greater conversion of new users to paying users in the quarter.
The contribution from AION, Shanda’s newest significant game, was meaningful in the quarter and likely the source of the growth of the MMO business, but Shanda maintained its policy of not releasing data on individual games. Even though it is not entirely clear, we believe its core business was essentially flat in Q2, potentially with modest growth, and that the addition of AION was the main catalyst of growth.
Casual games revenue was below our forecast. Q2 revenue was RMB 102.9 million versus our estimate of RMB 108.0 million. Shanda has not been able to drive growth in its casual business, even as it spends on the development and licensing of new titles. We believe that the casual game industry is growing in China, but other vendors, especially Tencent, are the beneficiaries of the growth. Casual APAs were 1.86 million and ARPU was RMB 18.4 versus our estimates of 1.75 million and RMB 19.9, respectively.
Other revenue was the big surprise in the quarter. It contributed RMB 59.6 million versus our estimate of RMB 45.0 million. It is timely that Shanda’s other revenue outperformed because it is the chunk of revenue that constitutes Shanda’s nongame assets. Despite increasing skepticism that Shanda can ever build this business into a significant revenue contributor, it appears to have gained traction, although it still contributes a small slice of Shanda’s overall revenue.
Active Paying Accounts Continue Their Ascent
Sources: Company reports, Pacific Crest Securities
Modest Decline in ARPU (RMB) from Higher APAs
Sources: Company reports, Pacific Crest Securities
‘AION’ Expansion Should Help Maintain Growth
Shanda released an expansion for AION in August that has stabilized growth in the game. While it clearly prefers not to discuss individual titles, Shanda did mention that it is pleased with the reception of the expansion. Further, Shanda will release another expansion in Q4 that should provide another boost to maintain momentum. While our expectations have remained relatively muted, even with the extremely positive response following beta testing last spring, AION continues to be a very positive contributor to growth for Shanda.
This Is a Good Entry Point in SNDA
With a rapidly growing Internet user base and continued strong results, the online game industry in China is underappreciated, in our view. Shanda is a market leader and a pioneer of Chinese online gaming’s revenue model, and has a well-diversified and leading game portfolio. SNDA has settled after skepticism around the release of AION and the spinoff of Shanda Games, which presents an attractive entry point. With SNDA trading at 128x our 2010 GAAP EPS estimate of $4.00, we continue to believe Shanda is underappreciated, and one of the best-positioned companies in the China online games sector.
Category: Online Games (China), SNDA | Tags: SNDA - September 4th, 2009, 5:54am
Event/Details:
More thoughts on the DIS/MVL deal
• Financial implications for DIS: The deal will be dilutive in F10 (Oct.) by mid-single digits. It is expected to be accretive by F12.
• Timing of closure: By the end of the year
Show details >>
• Marvel’s 3RD party relationships: It doesn’t sound like Disney is intent on quickly cancelling or restructuring Marvel’s deals with 3rd party licensors like Hasbro and Activision. It commented that at the expiration of these deals it will take a look at each independently and see whether the terms make sense for them to bring in house. In video games, in particular, DIS mentioned that we should continued to expect a mix of internal and external content
• Price: Still seems expensive (but not outrageous) to us even with the obvious business overlap, especially given the near-term dilution. While not as expensive as Pixar (which was incredibly expensive), Marvel doesn’t bring 1) Steve Jobs to the board of directors, 2) the creative team, 3) the track record, 4) the creative direction for other business units
• Our downgrade: After hanging onto an Outperform rating for 3.5 years and gleaning a 115% return we downgraded MVL on August 5th. We jumped off the boat 26 days too early. *Sigh*. We were excited about Iron Man 2 personally and professionally, but lacked the conviction in Marvel’s upcoming initial 2010 forecast. Given the timing of this announcement, Marvel may have as well. Marvel will likely report its Q3 results before the deal is closed, but likely won’t be compelled to issue 2010 guidance
Conclusion:
Unchanged for MVL. See below
Modest negative for DIS. The dilution in F10 and lack of accretion in F12 is modestly worse than our original back-of-the-envelope analysis. Disney doesn’t expect to extract meaningful cost synergies after the close of the transaction. It sounds like from a financial basis, Marvel will operate in largely a similar way.
(From this morning)
Event:
Disney has announced its intention to buy MVL for $50 per share or $4B
MVL shareholders will receive $30 per share and 0.745 Disney shares for each MVL share
Both boards have approved the transaction, but it will require approval from MVL shareholders
Conference call @ 7:15 PST. 800-260-8140
Conclusion:
Positive for MVL. Trading at $38.65 we think shareholders will likely approve the deal. Given that the MVL board has approved the deal, it’s unlikely that another bidder is hanging around.
Mixed for DIS. The acquisition makes strategic sense. Marvel adds 5,000 characters to Disney’s IP library, which Disney can leverage across its properties. While a strong fit for any media company, Disney’s theme parks make it more monetizable than for others. Marvel’s characters (especially at the box office) tend to attract an older consumer, but this will help Disney bolster a hole in its theatrical business for teens. Marvel’s licensing business is very similar to Disney’s and has notable synergies. The only thing we question is price, which at $50 is 23.3x our 2010 EPS estimate of $2.15. This is a significant premium to its peers. It’s not shocking that Disney is willing to pay up for well-known IP like it did with Pixar (it paid $7.4B for in 2006 including $1B in cash). While Marvel certainly has a larger number of well-known characters than Pixar, it doesn’t have the internal track record at the box office that Pixar did. Further, Pixar brought Disney creative direction, which added to the price. Marvel does not bring significant internal creative talent in the movie business.
Derivatives:
ERTS: There are still those that believe that Disney is going to buy Electronic Arts any minute now. We continue to think that is unlikely and that this deal would push out any announcement even if it were to happen.
ATVI: Activision is already owned by Vivendi, so there is no impact on an acquisition premium. Activision does make the Spider-Man and X-Men games for Marvel. Disney will likely take these properties (and all MVL properties) in house over the long-term. The next Spider-Man film is slated for 2011, which Activision has rights to, so the impact would come at some time after that release. It’s unclear what the future of the X-Men franchise is.
THQI: THQ just signed Marvel Superhero Squad, which it has multiple year rights for. If the TV show is successful then Disney may take the rights back over the long-term. If it isn’t successful then it isn’t meaningful anyway
-Evan
Category: DIS, MVL, Media-Film | Tags: DIS, M&A, MVL - August 31st, 2009, 8:32am
↑ Back to top
