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Thousands Of Shorts Royally Crushed After Activision Acquires King Digital

Call it an example of an abbreviated public lifecycle. After IPOing at $22.50 just last March and then promptly tumbling, Candy Crush maker King Digital was stuck in no man's land: demand for its products was promptly waning and the organic growth its underwriters had promised was nowhere to be found. The fundamentally savvy hedge funds sniffed this out and promptly jumped on board what seemed like a royal flush slam dunk to zero.

And then, overnight, out of nowhere Activision decided to crush the Candy Crush shorts, who had built up a short stake amounting to 25% of the float, when it announced it would acquire the company for $5.9 billion or $18/share, a 16% premium to the previous day closing price... and also a 20% discount to the IPO price.

From Reuters:

Video game maker Activision Blizzard Inc (ATVI.O) said it will buy "Candy Crush Saga" creator King Digital Entertainment (KING.N) for $5.9 billion to strengthen its mobile games portfolio.ABS Partners CV, a unit of Activision Blizzard, will acquire King shares for $18 each in cash, representing a premium of 16 percent to King's closing price on Monday.

 

The addition of King's mobile games will position Activision as a global leader in interactive entertainment across mobile, console and PC platforms, Activision said in a statement. Video game publishers are shifting to the lucrative digital business from physical sales of games as consumers shift from consoles to playing on smartphones and tablets.

 

The fast-growing mobile gaming segment is expected to generate more than $36 billion in revenue by the end of 2015, according to Activision.

 

Activision Blizzard Chief Executive Bobby Kotick told Reuters that buying King will help broaden the reach of its games and expand into new demographics, adding that 60 percent of King's players are female and that no gaming consoles or hardware, besides a phone, is needed to play King's games.

 

"You have such broad reach. This is a fantastic opportunity for us to create compelling content for new demographics," Kotick said.

 

Activision, which owns popular game franchises such as "World of Warcraft," "Call of Duty," and "Diablo," said the deal gives the combined company more than 500 million monthly active users across the world and would add to Activision's estimated 2016 adjusted revenue and earnings by about 30 percent.

 

Dublin, Ireland-based King will continue to operate as an independent operating unit led by Chief Executive Riccardo Zacconi. Zacconi told Reuters that Activision appealed to him because of the company's expertise in building long-lasting franchises.

 

King, which went public last March, has been struggling to boost bookings - an indicator of future revenue. The deal, expected to be completed by spring 2016, is subject to approval by King's shareholders and the Irish High Court, and clearances by antitrust authorities.

 

Activision said it will use $3.6 billion of offshore cash and borrow the rest from Bank of America Merrill Lynch and Goldman Sachs Bank as incremental lenders.

And just like that both those who held on to KING shares since the IPO, as well as thousands of shorts have managed to lose money thanks to a deal that could only happen thanks to the Fed's loose monetary policy and non-existent benchmark rates of return, which makes even a stupid deal such as this one accretive courtesy of virtually zero-cost debt.