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When big financial news is breaking in the gaming industry, I look to Wedbush Morgan Securities analyst Michael Pachter to break things down. I caught him on the phone today while he was having brunch at a yacht club (the same yacht club he was last brunching at when the Activision Blizzard deal was announced).
Who is this EA-Take Two deal good for? What would happen with sports and the cost of sports games? And why does he think Rockstar won’t necessarily be a part of the deal?
Pachter broke it down for me…
Multiplayer: Is this a good deal for EA? Good for Take-Two?
Michael Pachter: Probably yes and yes.
The EA side is a little more complicated… Take-Two is a company that hasn’t made money in a couple of years. It doesn’t have a lot of cash and I think it was a stretch to earn the money they earned this year… They [ultimately] earned about a dollar a share this year. EA is offering them 26 times that. It would take a lot of time to turn that around. They make a lot of money when they make ‘Grand Theft Auto‘ and they don’t when they don’t make ‘GTA.’ Their delusion that they will compete in sports — and the reason I say delusion is because EA’s done everything they can to put the squeeze on them — ultimately I think Take-Two would have to get out of that business. ‘GTA’ is a great asset. ‘Civilization‘ is a great asset. The Irrational guys, ‘Midnight Club.’ And the rest of the guys, who knows…
Multiplayer: So what about sports? How would getting that part of Take-Two help EA?
Pachter: EA looks at this business and says, ‘We could make two basketball games, two hockey games, two baseball games… [but] we’re just going to make one of each. … We have a better marketing machine so maybe we can do $300 million instead of $200 million.’ I think that’s rational …
Take-Two does $200 million in sales. EA does a billion-plus. If you combine them together EA sales will go up more than that combined number because they won’t cut price — you won’t see basketball games come down [in price] before Christmas ever again.
Multiplayer: How do you see it playing out? Is it inevitable that EA will buy Take-Two? Or can Take-Two effectively block them?
Pachter: EA started talking to them a long time ago, a year ago, they told me today. EA and Take-Two had a discussion about the acquisition in December. EA made an offer on February 6. [A second offer was made on February 19.] There won’t be another offer because there’s no other video game company that gets the sports position. There’s no media company that will see sports as possible.
Multiplayer: So is there any way for Take-Two to stop EA from getting their way?
Pachter: I don’t really think so, unless Take-Two shareholders think the stock is worth $40. But nobody is going to offer to buy it at $40.
Multiplayer: What role do you see Rockstar playing in this?
Pachter: ‘GTA’ is clearly a wonderful asset, worth a ton. The problem is that to make ‘GTA’ the way it has in the past you need to engage the Rockstar North guys. They’re not going to want the same deal as what they have now.
Multiplayer: So is Rockstar a dealbreaker?
Pachter: It’s not a dealbreaker. EA would love to hire them. But it’s a separate negotiation. I think the ‘Civilization’ — Firaxis guys — will work with [EA].
Multiplayer: Can you explain what it means that EA would be going public like this? Is that a sign of strength or desperation or something else?
Pachter: It’s quite similar with what Microsoft did with Yahoo… You go public when you want the court of public opinion to make a decision. I think EA is saying, ‘$25 was a fair offer. We’ll go to $26 but we’re not going any higher.’ I think the vast majority of Take-Two shareholders will jump at this. I don’t see a white knight. I don’t think Take-Two will be able to do anything to block this.
Multiplayer: Thanks for taking time out of brunch to talk to me today. Enjoy the rest of your Bloody Mary.
Pachter: I’m eating celery now…
Multiplayer: Cool. Well let me know the next time you’re having brunch at that yacht club. I’ll clear my schedule to do some work.