Take-Two May Take Sega

In its annual report, the company says it's mulling the purchase of Sega, the developer of its ESPN titles.
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Take-Two Interactive

(TTWO) - Get Report

is reportedly considering buying the developer behind its ESPN line of sports titles, despite a recent setback with its football game.

Under its agreement with

Sega

, which copublishes the ESPN line, Take-Two has the right to acquire Visual Concepts and Kush Games, a subsidiary of

Visual Concepts

, which developed Sega's sports games. Take-Two is negotiating the price it would pay for the game developers, the company said in its annual report filed Wednesday.

"We are continuing to evaluate potential opportunities in the market for sports titles," the company said in its report.

A Take-Two representative declined to comment on the negotiations.

Take-Two is best known for its

Grand Theft Auto

game franchise, which provides the lion's share of its revenue and earnings. But the company has been attempting to diversify its lineup beyond violent and adult-themed games.

In May, the company signed a three-year deal with Sega to co-publish the ESPN line of games. Under the deal, Take-Two agreed to pay the development and marketing costs of the ESPN titles in exchange for all of the revenue and profits generated from them, according to the its annual report.

The ESPN titles, which include games based on the National Football League, the National Hockey League and the National Basketball Association, had received critical acclaim in the past. But like similar games from other companies, they had struggled against the rival titles offered by industry leader

Electronic Arts

(ERTS)

.

Take-Two's plan was to offer the ESPN games at the discount price of about $20, or less than half the cost of the comparable games from EA. In terms of units sold, the strategy was a success. The company's football title alone has sold more than 2 million copies. And the effort forced EA to

discount its own titles.

But EA struck back earlier this month,

signing an exclusive deal with the NFL. The deal precludes Take-Two or another company from offering an NFL-based game for consoles, PCs or handheld devices for the next five years.

Analysts consider the NFL football game to be the most important of the ESPN franchises. According to its annual report, Take-Two has the right to cancel its deal with Sega if it does not renew its licenses with any of the major sports leagues or player associations, as was the case with the NFL. But that development apparently hasn't dissuaded the company from using the ESPN sports titles to broaden its lineup.

Take-Two has the option to purchase Visual Concepts and Kush Games through March 31, 2006, or the end of its deal with Sega, whichever comes first, according to its annual report.

In a separate but related move, Take-Two in October purchased game developer

Indie

from

Microsoft

(MSFT) - Get Report

for $18.5 million, according to the annual report. Indie has developed tennis, snowboarding and golf titles. The company also acquired U.K.-based

Venom

, which has developed a series of boxing titles based on the movie

Rocky

, Take-Two said in its annual report.

Take-Two shares closed regular trading off 13 cents, or 0.4%, to $32.89. In after-hours trading, the company's stock was off another 5 cents, or 0.2%, to $32.84.