Take-Two Interactive has announced the takeover of game developer Zynga (ZNGA). The deal will cost the acquiring party $12.7 billion, under the terms of the agreement, Zynga shareholders will receive $3.50 in cash and $6.36 in Take-Two Interactive shares, which will total $9.86 per ZNGA paper and provide a premium of 64%. Take-Two CEO Strauss Zelnik will remain the head of the combined company, and Zynga management will oversee the strategic direction of mobile games.
In our opinion, the deal is beneficial to both sides. Zynga employees will be able to create new exciting games based on those franchises owned by Take-Two, and Zynga shareholders will profit thanks to a significant premium. At the same time, the purchase price ($9.86 per Zynga share) is quite attractive for Take-Two, as it provides a 20% discount to the multi-year maximum reached in February 2021.
Previously, Take-Two management demonstrated low M&A activity, repeatedly repeating the thesis that the company will acquire only the most attractive assets. We believe that the takeover of Zynga fully coincides with the previously indicated position of management and consider the transaction as strategically justified for Take-Two Interactive for the following reasons:
- Mobile games are the most attractive segment of the gaming market with a growth rate of 8% in the next three years.
- Take-Two will be able to increase the share of revenue from mobile games from the current 12% to 50% by the end of the 2023 fiscal year, which will significantly reduce the volatility of the company's revenues, which until now has been heavily dependent on a long cycle of game development for consoles and PCs. As a result of this transformation, the issuer will attract more conservative institutional investors, for whom stability of financial results is important.
- Reducing part of administrative costs will provide savings of up to $100 million per year in two years.
- The company will be able to generate additional revenue in the amount of $500 million through the implementation of a number of initiatives, including the creation of new cross-platform games, the exchange of experience between development teams, as well as geographical expansion.
- As a result of the merger, Net Bookings (adjusted revenue) will grow by an average of 14% over three years (according to management estimates), which is higher than the industry average. At the same time, the forecast did not take into account the possibility of an increase in revenue by $500 million. According to FactSet, Take-Two's share in the global gaming market will increase from 2.6% to 4.2% as a result of the takeover.
After the announcement of the merger on January 10, Take-Two shares lost 13%, which we consider unjustified reactions, which, however, can be explained by the following reasons:
- To partially finance the Take-Two transaction, it will be necessary to attract a loan of $2.7 billion, which, however, will not prevent the combined company from maintaining financial flexibility and a low debt burden.
- This is a very large transaction, which can create certain difficulties during integration. Some investors doubt that it will be carried out successfully, but we would like to note the extensive experience of the top management of the combined company, which significantly reduces the risks.
- Some Take-Two investors believe that due to the merger of companies, the development of the highly anticipated GTA 6 game will be delayed and the release will be postponed to a later date. However, there have been no official comments on this matter, the release date is still unknown. In our opinion, the merger deal with Zynga is unlikely to interfere with Take-Two's internal plans for GTA 6.
As a result, we maintain the target price for TTWO shares at $220 and note a significant upside on the horizon of the year. The correction in securities, from our point of view, creates favorable conditions for increasing positions, since the ratio of risk and profit at current price levels is very attractive (potentially 1:4).