French telecom and media group Vivendi said it would combine its interactive gaming business with video game publisher Activision Inc. to form a new company called Activision Blizzard that will have online, console and interactive video games.

The deal will combine Activision, publisher of the popular Guitar Hero, Spider-Man and the Tony Hawk series, with Vivendi's Blizzard Entertainment's World of Warcraft, which is the world's biggest multiplayer online role-playing game franchise.

Under the terms of the multistep deal, Vivendi will contribute its Vivendi Games business, which it valued at $8.1 billion, and provide $1.7 billion in cash.

"By combining leaders in mass-market entertainment and subscription-based online games, Activision Blizzard will be the only publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry and reach the broadest possible audiences," said Activision's Chairman Robert Kotick.

Activision will be renamed Activision Blizzard and will operate as a publicly traded company. Vivendi will own 52 per cent of Activision Blizzard at the closing of the deal.

Within five business days after closing the transaction, the new Activision Blizzard will launch a $4 billion all-cash tender offer to purchase up to $146.5 million Activision Blizzard common shares at $27.50 per share.

The tender offer will be funded by Activision Blizzard's cash on hand at closing, including the $1.7 billion in cash received from the Vivendi share purchase. In addition, Vivendi has agreed to buy more newly issued shares for up to an additional $700 million, the proceeds of which would also be used to fund the tender offer.

Any remaining funds required to complete the tender offer will be borrowed by Activision Blizzard from Vivendi or third-party lenders. If the tender offer is fully subscribed, Vivendi would own about 68 per cent of Activision Blizzard.

The deal will immediately boost Activision's earnings in the first year after closing, and will be "slightly accretive" for Vivendi's stockholders, the companies said.

Activision Blizzard said it expects pro forma operating income of $1.1 billion and pro forma earnings per share of more than $1.20 a share in calendar year 2009.

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