Coverage: Activision buys Candy Crush’s maker for $5.9 billion

Sweet. Delicious. Crushed it. Activision Blizzard announced late Monday it was acquiring King Digital Entertainment, which rose to fame after creating Candy Crush, for $5.9 billion.

The deal will not only give Activision access to new global markets, but it will also help the traditional videogame giant make its way into mobile.

Sarah Needleman of The Wall Street Journal had details of the acquisition:

Activision Blizzard Inc. late Monday said it is acquiring King Digital Entertainment PLC for $5.9 billion, combining two giants of the videogame industry.

The deal gives Activision, a powerhouse in console videogames with hit franchises such as “Call of Duty” and “World of Warcraft,” a beachhead in the fast-growing business of mobile games.

King shot to fame in 2012 with its hit “Candy Crush Saga,” helping to position casual and inexpensive smartphone apps as a viable alternative to pricier games played on TVs and personal computers. While many of King’s other mobile games haven’t reached the same level of success, “Candy Crush” and its sequel are still among the top-grossing apps on Apple Inc.’s App Store.

Activision said it is paying $18 a share, a 20% premium to King’s 4 p.m. ET price of $14.96 on the New York Stock Exchange on Oct. 30. On Monday, King shares rose 3.9% to $15.54. Activision is using $3.4 billion in cash, plus a $2.3 billion loan, to pay for the deal.

Michael J. de la Merced and Nick Wingfield of The New York Times explained how King Digital has been struggling to spark the same fire with new games that it did with Candy Crush:

So far, Candy Crush has remained a steady performer, ranking third in the Apple app store’s top-grossing games three years after its release. But the company has said that the juggernaut has slowed down, and other games are not as popular — not even Candy Crush Soda, a related title released last year.

That lack of success in conjuring a new hit has weighed down King’s profit, which fell 28 percent in its second fiscal quarter from the same time a year ago, to $119 million.

Shares in the company have fallen 30 percent below their offer price, closing on Monday at $15.54 each. (They rose 4 percent on the day, though the reason is unclear.)

Yet the declining performance of Candy Crush and other King titles did not deter Activision from a deal, according to executives from both companies. Activision saw value in King’s network of players, which when combined with its own would yield an audience of more than 500 million unique users each month — bigger than Twitter’s base.

The expanse of King’s audience, stretching across the globe and including emerging markets that traditionally haven’t spent money on expensive video game consoles and PCs, also proved attractive.

And Activision is also betting that it can figure out new ways of breathing new life into the Candy Crush franchise, much as the company has done for its own titles like Call of Duty, these people added.

BBC News reported the deal would give Activision a global reach that it currently doesn’t have, particularly in Asia:

Candy Crush Saga, which was first launched on Facebook and smartphones in 2012, caught the public imagination and still makes up about a third of the company’s revenue.

Even though the company has produced more than 200 games, including the popular Bubble Witch and Farm Heroes, it has yet to repeat the success it found with Candy Crush Saga.

“Candy Crush Saga was such a massive global hit, it’s a very difficult challenge to replicate that even if they release sequels or expansions to the original theme or release new titles,” said Piers Harding-Rolls, Head of Games at IHS Technology. “The share price reflects that.”

“It’s a big move by Activision who have gained access to an audience that does not overlap with its existing market, particularly in Asia,” Mr Harding-Rolls added.

King Digital Entertainment helped boost its number of daily active users with the launch of Candy Crush Soda Saga in late 2014, but there has been a decline in player spending on their number one game.

The deal is expected to be completed by the second quarter of 2016, assuming approval from shareholders and regulators.

Chris Morris of Fortune explained why Activision would even want to buy King Digital:

With the buyout, Activision is able to address one of its chief areas of weakness: mobile.

It does so at a steep price, though. To put the $5.9 billion price tag in perspective, Amazon AMZN 0.39% spent $1.1 billion for red-hot video game streaming site Twitch last August. Facebook paid just $2 billion for virtual reality leader Oculus in March 2014. And Disney’s DIS 1.10% purchase of the Lucasfilm and the Star Wars franchise in 2012 came at a now seemingly bargain-priced $4.05 billion.

Activision’s franchises—which also include Destiny, Guitar Hero, and Skylanders—are strong. But Activision has been late to the mobile revolution and slow to embrace mobile gaming as the category has increased in size. (Mobile games, in the 12 months ending Sept. 2015, accounted for 19% of the total dollar spend on video game software, according to The NPD Group.) Rather than investing its own resources, the publisher has partnered with mobile-centric companies (including Tencent) to bring select franchises to mobile in emerging territories. In January, for instance, the two companies launched Call of Duty Online in China.

Aside from Skylanders, most of Activision’s major franchises don’t have a mobile presence in the U.S. One exception: Blizzard’s Hearthstone, a PC and mobile game that has attracted more than 25 million players. Hearthstone’s success may have been a key catalyst for Activision’s pursuit of King. Blizzard’s games appeal to a wide audience, but it’s nowhere close to the size of the Candy Crush player base. King’s games boasted 474 million monthly active users in the third quarter of 2015. (During its most recent earnings call in September, Activision said only that its MAUs had grown 35% year over year.)

With the purchase of King, Activision gains an in-house team of proven mobile veterans who can not only expand their own hit games, but help the company exploit its own franchises.