Vivendi Games, maker of the wildly popular World of Warcraft online role-playing game, has agreed to merge with American rival Activision to create the world's largest video game maker.
The complex share and cash deal, unveiled yesterday, will create a combined entity valued at $18.9bn (£9.2bn), with nearly $4bn in annual turnover.
Vivendi's chairman, Jean-Bernard Levy, said the creation of the new company, to be called Activision Blizzard, is a reflection of the evolution of video games from what was once the province of lonely adolescent boys to what today is a rapidly growing global entertainment market.
"This is a much larger entertainment story than it used to be. It's gone beyond the usual young male games addicts. It's a different, much broader story," he said, pointing the popularity of new consoles such as Nintendo's Wii, which have games aimed at women and the elderly as well as children, and the proliferation of games for mobile phones. "There are tons of things we can do now to leverage all that. This is where innovation in entertainment is happening right now," Mr Levy added.
Bringing together Vivendi's strength in computer-based games with Activision's expertise in games such as Spider Man and Guitar Hero for consoles such as the Wii and Sony Playstation 3, the newgroup will leapfrog Electronic Arts as the world's biggest game publisher.
For Activision, the key attraction was Blizzard, the American software group owned by Vivendi Games which created World of Warcraft, an online world of orcs and dungeons that at last count had signed up 9.3 million gamers, each paying a monthly fee of around £9. The economics of such online games are very powerful because once the games are designed, they have a steady subscription-based revenue stream and require minimal marketing, as their popularity is fed by internet forums and word of mouth. Blizzard, for example, expects to generate an operating profit of $520m on $1.1bn in turnover this year – a margin of nearly 50 per cent.
Getting access to those margins means that the combined group will be " light years ahead in terms of operating profitability" of its other rivals, said Robert Kotick, chairman and chief executive of Activision.
Activision, which will remain as a publicly traded stock on the Nasdaq exchange, expects the deal to add to earnings immediately. Under the terms of the transaction, Vivendi will end up with a 52 per cent ownership stake in the combined entity through two separate transactions. First, it will merge its games unit into Activision in exchange for 295 million shares of the American company's stock at $27.50 per share. It will then pay an additional $1.7bn in cash for a chunk of newly issued shares.
Vivendi could push up its holding to as much as 68 per cent if investors fully take up a $4bn tender it plans to launch within a week of the deal's completion.
The transaction comes as the world's big three console makers – Nintendo, Microsoft and Sony – are set to square off in a sales race pitting their respective next-generation consoles against each other during the Christmas shopping season.
Crucial to winning the sales war is the quality of the games that are developed for each system. Activision's Guitar Hero series, which is sold with a replica Gibson guitar fitted with multicoloured buttons on the neck that the player has to "play" in time with scrolling notes on the screen, has been a boon to Sony's Playstation.
Mr Kotick will be president and chief executive of Activision Blizzard, while Vivendi Games' chief executive, Bruce Hack, will take over as vice-chairman and chief corporate officer of the combined group. The deal is subject to approvals from the US and European antitrust authorities and Activision shareholders.