Citi’s Brent Thill was impressed with Take-Two’s (TTWO) recent blow-out quarter, but says the news fell on deaf ears because it’s a “deal stock.” Thill handicaps the potential outcomes for TTWO as follows:
60% Probability ERTS Acquires TTWO:
The most likely outcome is ERTS acquires TTWO for between $28-$30. We expect ERTS will wait for HSR approval [Hart Scott Redino–anti-trust] before raising its bid so as not to risk any deal structure changes due to an adverse HSR ruling. Less likely but possible is ERTS could walk. We believe ERTS would like to close the deal by September to control Holiday season distribution of GTA 4 and could walk if timing of the deal jeopardized that outcome [note: Seems highly unlikely to us that the deal could actually be closed by September]. Under this scenario, based on the current composition of the shareholder base we see 20% downside to shares if no other bidders emerge.
30% Probability a Media Company Acquires TTWO:
TTWO would make a natural fit for a media company given its portfolio of original IP (no rival IP conflicts), and TTWO Chairman Strauss Zelnick is a media industry veteran with strong industry relationships, including with Time Warner Chairman Dick Parsons. Time Warner is looking to become a significant game publisher with a $1bn 5-year revenue goal. News Corp sold its gaming assets in 2003, but may be looking to re-enter the gaming space post the ATVI/Vivendi deal and notably TTWO CEO Ben Feder is a News Corp alum.
10% Probability TTWO Remains Independent.
Citi maintains a HOLD on TTWO and have raised their target price from $30 to $33.