Why EA Will Win the Take-Two Takeover

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Written by BuckGB on February 26th, 2008

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Take-Two doesn't really have any other options. If a second bidder doesn't surface (we think a second bid is extremely unlikely), Take-Two has no real leverage. We don't think it is credible for management to ask shareholders to trust them to grow the business and earnings to the point where a $26 share price is warranted at today's multiples.

We base this assessment on the EV/adjusted net income multiples for EA (around 12x FY:11 adjusted net income, implying around 17x the discounted present value), Activision (around 22x FY:08 adjusted net income, with price support from the pending Vivendi tender), THQ (around 10x consensus FY:09 adjusted net income), and Ubisoft (around 25x consensus FY:09 adjusted net income).

The average of these "peers" is a forward multiple of 18.5x, so if we were to value TTWO at the peer average, the company would have to demonstrate after-tax net income earnings power of $1.40/share. This figure reflects EPS growth of around 35% above the implied $1.05 after-tax EPS suggested by the high end of company guidance for the year, and requires significantly more "turnaround" than management has committed to thus far.

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