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Take-Two Stock Jumps After BMO Capital 'Outperform' Upgrade On $12.7 Billion Zynga Takeover

BMO Capital analyst Gerrick Johnson says Take-Two's $12.7 billion takeover of Farmville maker Zynga will allow it to expand its key game offerings in the fast-growing mobile sector.

Take-Two Interactive  (TTWO) - Get Take-Two Interactive Software, Inc. Report shares jumped higher Wednesday after analysts at BMO Capital Markets boosted their rating on the stock following its planned takeover of Farmville maker Zynga  (ZNGA) - Get Zynga Inc. Class A Report.

BMO analyst Gerrick Johnson raised his rating on Take-Two to 'outperform', while holding his price target in place at $180 per share, as he sees the group's $12.7 billion cash-and-stock purchase of Zynga leveraging its key video game properties, including Grand Theft Auto and NBA 2k, into the mobile sector. 

5G network rollouts, cloud gaming and smartphone upgrades are likely to extend the growth rate of mobile gaming, which is firmly outpacing the industry and attracting younger players who are prepared to commit more time to gaming activity, BMO analysts noted. 

A key mobile release from video game rival Activision Blizzard  (ATVI) - Get Activision Blizzard, Inc. Report, BMO noted, has been downloaded more than 500 million times since October 2019 and generated more than $1.5 billion in bookings. Take-Two's best mobile offering to day, WWE SuperCard, has generated just $40 million. 

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"The Covid pandemic has accelerated trends already in motion, including the transition to digital distribution offering higher margins and the opportunity for incremental add-on sales and multi-player online services," Johnson said. "We believe the social network aspect of video games has also come to the forefront for a lot of players."  

"We think this is a good deal for Take-Two and view positively the opportunity to increase scale in the rapidly growing mobile games business," Johnson added. "We see strong potential synergy opportunities, and think market conditions provided Take-Two with an attractive opportunity from a valuation standpoint."  

Take-Two shares were marked 3.7% higher in early Wednesday trading to change hands at $153.86 each. That would still leave the stock some 7.5% south of its closing price prior to news of its $12.7 billion purchase of Zynga on Monday. 

Zynga shares, meanwhile, rose 2.6% higher to $9.08 each. 

The cash-and-stock deal values Zynga at $9.68 per share, the companies said, and pegs the San Francisco-based group's -- and maker of the social video game Farmville -- enterprise value at around $12.7 billion. Take-Two will pay $3.50 in cash and $6.36 in Take-Two common stock for each Zynga share, the companies said. 

Take-Two CEO Strauss Zelnick will lead the combined group once the deal is closed, which the pair anticipate will be in the second half of this calendar year. Take-Two shareholders will own between 67.2% and 70.4% of the combined groups when the deal is completed.