Earlier this month, Gerber Kawasaki analyst Nick Licouris suggested that entertainment powerhouse The Walt Disney Company (NYSE:DIS) should consider ponying up for video game publisher Activision Blizzard (NASDAQ:ATVI). The analyst laid out his case in an interview with Bloomberg, offering a few compelling symmetries that would make this a tantalizing combination.
Gerber Kawasaki, a wealth and investment management service, holds about 90,000 shares of Activision -- currently worth about $4.3 million -- and 152,000 shares of Disney, worth just short of $22 million. That's a sizable stake, so they would surely benefit from such a tie-up.
While the marriage might present intriguing opportunities, there's also reason to believe it won't happen. Here's a look at why Disney should -- and shouldn't -- acquire Activision.
A steal at this price
After a scorching multiyear run that began in 2015, Activision Blizzard stock scaled all-time highs above $83 per in October of last year, with its share price gaining more than 300%. Since then, though, Activision has fallen on hard times. Fears of slowing growth and the incursion of free-to-play titles, like Epic Games' Fortnite Battle Royale, gave investors pause and caused the stock to lose nearly half its value.
That sell-off is clearly overdone. Growth has been pinched, with net revenue down about 7% year over year in the first quarter. However, net revenue climbed 6.8% year over year in 2018, after seeing 6.2% growth in 2017. Activision has since announced a massive restructuring designed to reignite its growth.
At Activision's current price, Disney would be getting the video game publisher for a steal -- even if you consider the 20% to 30% premium investors typically require to consummate a deal of this magnitude.
A stake in the emerging esports industry
While esports is still in the early stages, it represents an area of potentially explosive growth. The nascent industry is expected to generate revenue of more than $1.1 billion in 2019, up about 27% year over year, according to data gathered by industry tracker Newzoo. The video game faithful are flocking to esports, with global audiences expected to top 454 million this year, and growing to 645 million by 2022.
Disney already has a tenuous connection to the field, penning a multiyear deal with Activision to broadcast Overwatch League games on Disney's television and cable networks. A marriage with Activision Blizzard would give Disney a foothold in a young and fast-growing industry via Activision's Overwatch League.
The gaming market is huge
Gaming is big and only getting bigger. The global games market is expected to generate revenue of more than $152 billion in 2019, up nearly 10% year over year. Another intriguing tidbit is that 45% of that total, or about $69 billion, will come from mobile.
Disney has a massive and growing treasure trove of intellectual property -- which just got even bigger with its recent acquisition of the film and television studio assets of Fox. This wealth of content could fuel games for every genre and taste, making the company an instant "player" in the industry.
A sorted history
Even with all the potential upside, a merger between Disney and Activision still isn't a no-brainer. For all of its successes in movies, theme parks, and consumer goods, when it comes to the video game business, Disney's history doesn't exactly inspire confidence. After numerous attempts to crack the code of the video game publishing business -- including its highly regarded Disney Infinity franchise -- the company eventually shuttered its Interactive Studio operations in 2016.
Disney CEO Bob Iger as much as threw in the towel after a series of otherwise disappointing efforts. "Over the years, as you know, we've tried our hand at self-publishing," Iger said, continuing on Disney's conference call in February:
We've bought companies. We've sold companies. We've bought developers. We've closed developers. We've found over the years that we haven't been particularly good at the self-publishing side ... We've just decided that the best place for us to be in that space is licensing and not publishing.
Licouris suggested that time was of the essence. "Ideally for an investor you want this to happen now," he said.
It's important to note that a deal of this size wouldn't come cheap. Activision currently sports a market cap of nearly $37 billion -- even after its recent plummet. Factoring in an acquisition premium of 20% to 30% would result in a price tag of between $44 billion and $48 billion.
Any such deal would likely involve Disney taking on additional debt. After the recent acquisition of Fox, Disney already has about $57 billion in debt on its books at the end of last quarter.
For all the potential opportunity that acquiring Activision could bring, Iger probably isn't willing to risk his legacy in an area where Disney frankly doesn't have a very good track record.