Hollywood has had more than its share of major deals in the last few years — from Walt Disney’s Fox acquisition and Amazon’s expected takeover of MGM to the proposed Discovery-WarnerMedia merger — as entertainment companies look to boost their scale in the streaming age.
Could the video gaming sector soon see a similar M&A merry-go-round? Take-Two Interactive’s agreement to buy mobile gaming powerhouse Zynga in a $12.7 billion deal that will bring together the companies behind such hits as Grand Theft Auto, NBA 2K, CSR Racing, FarmVille and Words With Friends could point that way.
Some Wall Street analysts seem to think so. “In our view, the combination of Take-Two and Zynga makes a lot of sense, especially given the economies of scale, which can be achieved through data analytics and future synergies from the expertise and the skill sets within the two largely complementary businesses,” MKM Partners analyst Eric Handler wrote in a Jan. 13 report. “Furthermore, given the increasing importance of scale, we believe Take-Two and other video games companies will continue to seek out acquisitions, particularly in the mobile segment, which is the industry’s largest and fastest-growing space.”
Who could be a future takeover target? “We see Playtika as the most likely take-out candidate among the available publicly traded companies,” Handler suggested. The Israel-based company makes mobile games, including Bingo Blitz and Pirate Kings.
Even Zynga could attract alternative bids given the Take-Two deal includes a 45-day “go-shop period,” allowing it to look at other offers. “One of the interesting features of this deal is a 45-day ‘go-shop’ provision, which enables Zynga to essentially see if Take-Two’s offer is fair, and if there’s something better,” Stifel analyst Drew Crum wrote in his report. “So stay tuned.”
Cowen analyst Doug Creutz told investors that “we definitely think that other parties might be interested in competing against Take-Two’s offer.” He added: “Electronic Arts is the most obvious candidate; while they bulked up on mobile in 2021 with the Playdemic and Glu deals, we don’t think the Glu assets have performed particularly well over the past year, and they might be looking to further buttress their mobile capability.”
How about other gaming giants? “We think Activision is a highly unlikely bidder,” Creutz offered. “Their mobile assets (King/Call of Duty Mobile) are currently the strongest performing parts of their business, and we think they probably don’t have the bandwidth for a major deal right now given their internal issues.” Cruetz added: “Overall, we’d say the chance of another, higher bidder coming in is in the 20 percent range, though that climbs if Take-Two’s share price continues to decline,” lowering the value of the stock portion of the deal.
Handler also estimated the chances of a bidding war at less than 50 percent. “We view the likelihood of a superior proposal at less than 40 percent,” he shared.
Overall, Wall Street likes the combination of Take-Two and Zynga, which recently unveiled music- and dancing-themed game Disco Loco 3D for TikTok, for its financial and strategic benefits. It “makes a lot of sense, has good growth potential and is expected to be instantly accretive,” Handler noted. “We do not anticipate any regulatory issues.”
“The acquisition of Zynga by Take-Two makes a lot of sense to us,” echoed Wedbush analyst Michael Pachter. “Take-Two has long aspired to grow its mobile games business, and the acquisition accelerates those plans at a reasonable price.”
Still, “from a strategic perspective, the acquisition of Zynga bolsters Take-Two’s presence in mobile gaming (12 percent of net bookings pre- deal; 50 percent of net bookings post- deal), the largest (2021: $136 billion) and one of the fastest-growing pieces of the global market, and a category that the company has historically under-indexed,” Crum noted. It also “adds a complementary portfolio of diversified mobile games, with leading titles across casual, social casino, racing and hyper-casual.”
MoffettNathanson analyst Clay Griffin had a negative take on the gaming mega-deal though, downgrading Take-Two’s stock from “buy” to “neutral” over the agreement. “Organic growth was always central to the Take-Two bull thesis, which forecast that a burgeoning pipeline, leveraging new and existing intellectual property would result in a material inflection in cash flows and earnings. The ball was in their court and was primarily determined by just creative and operational execution,” Griffin explained.
Concluded Griffin: “This is a huge bet for Take-Two. And with such a departure for Take-Two, it’s impossible to not be concerned about the health of the original thesis. … Perhaps that piece is still intact, but perhaps it’s not. It is, though, now part of a bigger, and undeniably different story.”