EA & Take Two – the analyst view

While Take Two boss Strauss Zelnick has said that the $2bn bid substantially undervalues” the publisher’s portfolio, key analysts believe that Take Two is playing a dangerous game by rejecting the approach and holding out for a better offer.

I would imagine there is room for negotiation,” said Colin Sebastian of Lazard Capital Markets. However, Take Two risks EA walking away from the offer if they wait too long, particularly as EA loses the opportunity to benefit from revenues from GTA IV.”

Fellow analyst Nick Parker agrees that Take Two should hurry up and seal the deal before EA lose interest. The bid is pretty good already and Take Two should accept it,” he told MCV.

There are reasons why Take Two want to wait until the launch of GTA IV – to improve the value of the company for another suitor and play one off against the other, and to give them time to see if its share price improves to push for a higher offer. I’m not sure EA would push much higher or indeed should, as previous iterations never got Take Two’s share price much above $26.

Also it depends on how much EA is looking over their shoulder at Activision Blizzard, although Riccitiello says they thought about this move last year.”

Senior games analyst at Screen Digest Piers Harding-Rolls added that Take Two’s shareholders could keep their nerve and hold out for a better deal – but that it represents a risky strategy:

The fact that EA has now made its bid public knowledge suggests that it believes it will gain support from shareholders at the current offer price. It depends on shareholder reaction and the influence that Take Two’s executive team holds over those investors as to whether EA increases its offer.”

Edward S. Williams and Thomas F. Andrews,
BMO Capital Markets

We expect Take-Two to pursue and possibly entertain bids for the company from other potential suitors. Given some strong assets, we believe that there are parties that have an interest in acquiring Take-Two.

However, with Activision effectively tied up with its pending merger with Vivendi Games, we believe one of the bigger and better capitalized players in the interactive entertainment industry is not in a position to tackle this potential acquisition.

Within the interactive entertainment space one of the more likely partners, therefore, would be Ubisoft – which would bring with it the complexity of a cross-border transaction. We believe that eventually EA and Take-Two will sit down to discuss a potential merger.

In the event that those discussions either do not occur, or do not yield a satisfactory outcome for EA, we believe that EA may approach shareholders directly before potentially walking away from the transaction.”

Michael Pachter, Wedbush Morgan

We think that EA plans to combine Take-Two’s sports business with its own, and will likely generate around $300 million in incremental revenue from sports.

We believe that by combining sports businesses, EA will be able to maintain sports pricing past the holidays, where in the past, it has discounted sports games before Christmas due to competition from Take-Two. We also think that there are tremendous synergies to be gained from consolidation outside of sports.

We think that some combination of these games can be produced each year, with the first five ‘franchises’ produced on a two-year or three-year cycle, and with the other games produced every three years. We estimate that these games (excluding Grand Theft Auto) would generate approximately $150 million in annual predictable revenues.”