3/26/2008

Take-Two Still Playing the Game
By Brian Sozzi

Take-Two Interactive (ticker: TTWO) has just tossed a Hail Mary pass to the end zone and scored, at least for now, in its valiant attempt to ward off acquirer Electronic Arts Inc. (ticker: ERTS).  In a press release issued today, the maker of the Grand Theft Auto videogame franchise announced it has thoroughly reviewed EA’s unsolicited tender offer, and its Board of Directors has unanimously recommended shareholders not tender their shares.  The Company laid out an array of reasons supporting its contention, none of them new to the situation, though managed to throw in a few intriguing snippets.  First, the Company’s Board of Directors has adopted a shareholders rights agreement (also known as a poison pill) to essentially block the EA unsolicited takeover.  Under the agreement, the rights will become exercisable if any acquirer purchases 20.0% or more of Take-Two’s common stock.  Second, the Company stated its intent to explore strategic alternatives after the April 29 release of Grand Theft Auto IV, either through a combination with a third-party or with EA, remaining independent, or implementing other value creating measures.  Finally, some color was provided on estimated synergies to EA should it successfully complete a buyout; management projects $50.0-$210.0 million per year in synergies following a transaction.

We must say, EA is starting to look like the big bully in what has emerged as a classic takeover struggle.  Take-Two’s management has been steadfast in its desire to wait until after the Grand Theft Auto IV release to engage interested parties in a meaningful way.  Is there a risk some interested buyers back off a deal if Grand Theft Auto IV fails to blow previous sales performances of the title away, you bet.  But, Take-Two’s management apparently enjoys playing with fire, and in the end, it could lead to a higher buyout price from EA or another party as we believe Grand Theft Auto IV will be an industry force in 2008 and serve to demonstrate the vitality of the franchise. 

We continue to recommend shares of Take-Two as an investment based on the following viewpoints:

1. EA is still in the game, and at some point it could (needs to in light of the poison pill adoption) raise its stated offer.
2. Take-Two management is still open to facilitating shareholder value creating transactions.
3. The fundamentals of Take-Two continue to strengthen and are supportive of a share price above current levels.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.