Take-Two vulnerable despite $500M blockbuster

By Yi-Wyn Yen

Take-Two Interactive’s management is rallying behind the videogame company’s impressive release of Grand Theft Auto IV last month, but its $500 million opening week may not have been good enough to impress shareholders or ward off a hostile takeover from EA.

Take-Two’s popular franchise, which was released on April 29, crushed Halo 3 in video game sales records and even surpassed movie ticket sales for Spider-Man 3, the blockbuster movie with the highest grossing opening week.

But investors haven’t been inspired to value the company any higher since Grand Theft’s results were released Wednesday morning. Take-Two’s shares shot up 55% after EA announced its unsolicited $1.9 billion offer on Feb. 25, and have remained relatively steady since then. Prior to the bid, Take-Two’s stock traded in the mid-teens.

“Take-Two is totally justified in being very proud of Grand Theft Auto, but this goes to show you that the company is not worth any more today than it was on Feb. 25,” said WedBush Morgan analyst Michael Pachter. “The first-week results have changed nothing.”

Take-Two is banking on its best bargaining chip, GTA IV, to show how valuable the company is to potential buyers. GTA IV sold more than 6 million games in its opening week for more than a half billion worldwide. Halo 3, a Microsoft (MSFT) Xbox 360 exclusive, was the previous record holder with its $300 million first-week launch. Spider-Man 3, the No. 1 box office opener, brought in roughly $382 million worldwide in roughly the same time frame, according to Box Office Mojo.

The box office comparison isn’t “apples to apples” since videogames cost about six times more than a regular movie ticket, but that didn’t stop Take-Two (TTWO) from vigorously bragging about its new record. “This is the largest entertainment release for a first week launch,” Take-Two CEO Ben Feder told Fortune. “What it says about Grand Theft Auto is nothing less than remarkable.”

Analysts expect Take-Two to rake in more than $1 billion in GTA IV revenue by selling roughly 18 million copies through 2009.

There are concerns that without GTA, Take-Two is simply a one-hit wonder. “Every couple years it has a windfall product launch based on a really valuable [intellectual property] and it’s really lean in between those years,” said John Taylor of Arcadia Research. “For Take-Two so much depends on when the next shipment of Grand Theft Auto releases.”

Feder says the company is not just about the GTA franchise. “Take-Two is uniquely positioned in the industry and has the broadest array of intellectual property,” he said.

EA (ERTS) went hostile with its all-cash offer when Take-Two’s management rejected its bid in late February. It has given Take-Two shareholders until May 16 to consider its tender offer.

However, that doesn’t mean that EA and Take-Two’s management aren’t in negotiations. Take-Two’s chairman Strauss Zelnick said he would be willing to talk with EA or any other interested buyers the day after GTA IV’s launch. Last month Zelnick said at a shareholder meeting that he refused EA’s offer prior to that date because it was “highly opportunistic and poorly timed” to get the most out of Grand Theft Auto.

Feder and an EA spokesman said they had no comment on whether the parties are currently in talks

The alternative for EA is to simply walk away from the deal. But analysts say that is an unlikely scenario. They still anticipate the deal to go through, though at a slightly higher share price between $26 to $28. A dilution of shares awarded to Take-Two’s management has reduced the value of Take-Two’s original offer price by 26 cents to $25.74.

“Will EA go higher? Of course they will. But if Take-Two sits down and they want $30, that’s not possible,” said Pachter. “Are EA and Take-Two talking? Of course they are. The question is, will the two sides come up with a reasonable compromise.”