Take-Two Could Drive Even Higher

The bidding for Take-Two Interactive ( TTWO) has sent its shares soaring and it may go higher.

Video-games publisher Electronic Arts' ( ERTS) $2 billion bid for its smaller rival Take-Two sent the latter's shares soaring more than 54% on Monday.

Now Take-Two's shareholders are holding out for more, betting EA will open its wallet even wider. And their hunch may be on the mark.

EA could raise its generous offer by $1 at least to $4 if pushed, some analysts say.

Take-Two's stock closed up $9.49 to $26.85 moving past EA's bid of $26 a share in cash on Sunday.

EA's offer represents nearly a 50% premium over Take-Two's closing price of $17.36 Friday and a 64% increase over the stock quote on Feb. 15, the last day before EA sent in a revised bid privately to the company.

But with Take-Two's board rejecting its bid twice, EA felt it had no choice but to take its offer public and watch Take-Two's stock rise.

"EA is bidding against itself right now," says Arvind Bhatia, an analyst with Sterne, Agee & Leach. "They could go a little higher if needed and if it takes another $1 or $2 to complete the deal they will do it." Shares of EA closed down $2.60, or 5.2%, to $47.14 Monday.

Analysts say both EA and Take-Two need this merger. They say EA's purchase of Take-Two will bring the company a new stable of franchises, reap millions in revenue from the upcoming Grand Theft Auto IV game and decimate its competition in the sports genre.

EA can afford to make Take-Two shareholders sweat a little but it is running up against some deadlines of its own. The Redwood City, Calif. -based EA is keen to gain control of Take-Two before the company releases Grand Theft Auto IV, its biggest hit of the year and a title expected to become the year's best-selling game. Grand Theft Auto IV hits retail shelves on April 29.

"EA wants to seal this transaction before the April 29 release ostensibly so that the deal can close in time for EA to influence sales of Grand Theft Auto IV in the 2008 holiday season," says Christopher Hickey, an analyst with Atlantic Equities in a research note. Atlantic Equities does not own shares or have an investment banking relationship with EA and Take-Two.

Hickey is betting that EA's eagerness to close the deal could lead the company to pay as much as $30 a share for Take-Two. Even paying $30 a share in cash, the deal could add 4% to EA's fiscal 2010 EPS, he estimates.

EA's acquisition of Take-Two, if successful, would be the largest in recent years. The company's growth strategy has depended in large part on acquisitions.

Take-Two's management is facing its own pressures. The company's top four shareholders, who own nearly 50% of its outstanding stock, are likely to push for an agreement. Take-Two also has its annual shareholder meeting in early April, when many investors are likely to push for the deal.

"Take-Two will be forced to do something here," says Bhatia. "Investors are going to look at it and ask the management to go for it."

And some analysts say EA may already be overpaying for Take-Two. "Given that Take-Two's business overlaps EA's in many areas and Take-Two's ongoing legal issues, we believe that EA is willing to pay too high of a price," says Evan Wilson, an analyst with Pacific Crest Securities in a research note. Pacific Crest makes a market in EA and Take-Two shares.

So far, Take-Two's management hasn't said it wants to keep the company independent but rather that it would like to evaluate its options once Grand Theft Auto IV releases -- a game it has pinned high hopes on.

EA's recent major acqusitions

By then it may be too late and EA could lose interest, warns Bhatia. "Beyond GTA IV, Take-Two's visibility goes down quite a bit."

If Take-Two's management continues to reject EA's bid, EA has another alternative, points out Michael Pachter, an analyst for Wedbush Morgan. "If the deal remains hostile, I think that EA can withdraw their bid, nominate a slate of directors, and buy stock on the open market."

Either way, Take-Two's shareholders are likely to emerge the winner because Take-Two's share price is likely to go higher.