Overview
It is early January 2023. Activision Blizzard (a division of Microsoft Gaming) wants to get into
the business of gaming arenas. It wants to go in strong! The company plans to build 40 arenas across the US. The cost of each is going to be $250 million each or $10 billion in total. The company projects that this line of business investment will have an IRR of over 20% for the next decade. To fund the endeavor the company wants to use $3 billion of cash and issue $7.0 billion of senior secured bonds. The company had the bonds rated at a junky “B+” as they are tied to the arenas as collateral and not the Microsoft parent company. As a result, the company based on the advice of its advisors is structuring them as 10-year notes with a 11.25% coupon. At issuance they are expected to initially sell at par. The underwriting fee of 2% is an expense that would hit the income statement this year (assume the financials are all current year). Analyze the company’s current financials (calculate and analyze key metrics and ratios that are specific to the transaction) show your work. Also, create future looking summary pro formas to determine how they will look if they finance the deal as planned. Assume all the money is spent next year but the arenas take 3 years to open and do not bring in any added revenues for the foreseeable future. Also assume the company performs operationally very similar to the latest financials. Write up your detailed assessment of the financing and its impact on the company. You are advising the CEO and CFO so also provide your opinion on the financing and what if anything you would do differently.