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No extention for Electronic Arts Take-Two Deadline

August 18, 2008 7:55:24 PM PDT
Video game publisher Electronic Arts Inc. is retracting its hostile bid for smaller rival Take-Two Interactive Software Inc., but a deal - and a friendly one at that - is likelier than ever. Take-Two, best known for the popular "Grand Theft Auto" video game series, confirmed Monday it expects to sign a confidentiality agreement with EA to begin formal discussions about "strategic alternatives."

EA had said earlier it wouldn't extend the Monday night deadline for its $2 billion tender offer to buy Take-Two. The companies have been unable to agree on a price for the past six months.

Now, EA says that if it does buy Take-Two, it no longer believes it can combine the company in time for the holidays, when video game companies make most of their money. Because of this, EA said it needs to review assumptions made to support its offer price of $25.74 per share.

"They are both posturing," said Wedbush Morgan analyst Michael Pachter. "EA is saying `we want to pay less,' Take-Two is saying they want more. The important thing is that they are talking."

EA already has extended its deadline for the offer five times, mostly to let regulators continue their antitrust review. The company said it would let the offer expire at 11:59 p.m. EDT Monday, and added it "remains confident that antitrust issues will not prevent or delay a transaction." The Federal Trade Commission is scheduled to complete its review by Thursday.

On Monday, EA said it will entertain a financial presentation by Take-Two under confidentiality agreements. Take-Two's management said it plans to present EA with its three-year product release schedule, financial projections and other nonpublic information meant to support its claims of what the company is worth.

EA wants to buy Take-Two not just for the "Grand Theft Auto" franchise, the company's main source of revenue, but also for its sports business and critically acclaimed titles such as "BioShock," which is being made into a movie. Take-Two's sales for the most recent fiscal year, which ended in October, totaled $982 million. EA, meanwhile, reaped sales of $3.67 billion in the year ended March 31.

On Friday, EA Chief Executive John Riccitiello called Strauss Zelnick, chairman of Take-Two's board, to discuss the offer. Following further discussions over the weekend, EA agreed to hear Take-Two's presentation.

In a letter made public Monday, Zelnick said the company "has made significant strides since EA first expressed interest" in Take-Two. In a separate statement, Zelnick said his company's board remains "unwavering in its belief" that EA's offer price was too low.

Shares of New York-based Take-Two slid $1.09, or 4.4 percent, to $23.75. This is still well above $17.36, the stock's closing price on Feb. 22, the last trading day before EA announced its offer of $25.74 per share. This could signal that investors are confident a deal will go through, but the question is at what price, and when.

Pachter, for one, said if the companies' managements "are as smart as I think they are," this price will be somewhere between $26 and $27, and an agreement could happen this week. But if Take-Two decides to hold out for a higher price, like $30 or more, the analyst expects EA to go hostile again, and at a price closer to $20. This, Pachter noted, is less likely, given the "dearth of other bidders."

If a deal does happen, EA has said it would give Take-Two's creative teams - many of which have worked under a succession of CEOs over the past few years - a "stable management" that understands video games. Riccitiello took over at EA in April 2007 and has since reorganized the software publisher into a "city-state model," with four game divisions and distinct, independent development studios.

Still, EA has been under pressure from investors to improve its creativity and rely less on sequels of existing hits - something the Take-Two acquisition could help accomplish.

Zelnick took over as chairman of Take-Two after a March 2007 shareholder coup ousted most of the company's top executives and board members over poor results, accounting troubles and controversy surrounding violent and sexual content in games. Several former executives, including ex-Chairman and CEO Ryan A. Brant, pleaded guilty in 2007 to falsifying business records after a probe into backdated stock options.

Shares of Redwood City, Calif.-based EA fell 48 cents to $47.76.


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