Take-Two Gains Upper Hand

EA's announcement leaves Take-Two in a better position to get what it wants from the buyout battle.
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SAN FRANCISCO -- Video games publisher

Take-Two Interactive

(TTWO) - Get Report

has gained the upper hand in the high-stakes buyout battle between it and larger rival

Electronics Arts

(ERTS)

.

That was apparent after EA announced Friday it had extended its tender offer for Take-Two shares that had been set to expire at midnight to May 16. At the same time it reduced its bid to $25.74 a share of Take-Two from $26 a share.

The revised bid takes into consideration the 2 million additional shares that Take-Two shareholders agreed to issue as part of a stock incentive plan. But it does not change EA's overall $2 billion valuation of the company.

Perhaps the most telling disclosure from EA on Friday is that it has gathered barely 9% of Take-Two shares for its tender offer, far short of the more than 50% needed for the offer to succeed.

With that huge hurdle to overcome, its decision to drop the share price is hardly going to go over well with existing shareholders.

Indeed, analysts say the only way EA can clinch the deal is to raise its price for Take-Two. Take-Two's management has insisted all along EA's bid undervalues the company.

The extension of the deadline for the tender offer also represents a concession by EA that it now has to play this acquisition game by Take-Two's rules.

Take-Two's management has said it is willing to negotiate but only after the April 29 release of

Grand Theft Auto IV

, a stance that EA had rejected so far but now seems to have tacitly agreed to.

EA first made its offer for Take-Two public in February, after the latter's management had rejected friendly requests to negotiate. Take-Two has maintained that EA's bid undervalues the company and is "opportunistic" since it comes before the release of

Grand Theft Auto IV

, Take-Two's much-awaited game that is expected to be the biggest blockbuster of the year.

But now EA is

left with few choices

.

Take-Two's trump card is the much-coveted

Grand Theft Auto IV

game and the extension of the deadline for EA's tender offer plays right into Take-Two's hands.

With initial buzz for

Grand Theft Auto IV

game being strong and near-perfect review scores so far, the game could beat sky-high expectations and put Take-Two further in a position of strength after its release.

Take-Two shareholders seem to be counting on that and remain unfazed by EA's latest move. Take-Two's stock was up 26 cents, or 1%, to $26.11 in recent trading. Shares of Electronic Arts added $1.34, or 2.6%, to $52.77 in recent trading.

One reason that EA hasn't been able to make much headway with Take-Two shareholders is that a significant chunk of Take-Two's stock is in the hands of arbitrageurs -- traders who hope to profit from the difference between the current stock price and the price at which a deal, if any, gets done.

"Many of these arbitrageurs have bought the stock in the $25 to $26 area, so they are not going to tender their shares at the current price," says Arvind Bhatia, an analyst with Sterne, Agee & Leach, which makes a market in shares of EA and Take-Two.

"These shareholders are not trading the stock on fundamentals but on the probability of whether a deal will happen or not and making some money out of it," he says.

Whether EA will walk away from the deal is unclear, but Doug Creutz, an analyst at Cowen, says the extension of the tender offer significantly lowers the probability that it will.

"The most likely outcome will be a completed deal in the $28 to $30 price range," says Cowen in a research note.

That's exactly what Take-Two's management wants and so far it is holding all the right cards.