How much for video gaming's bad boy?
Posted
Mar 04 2008, 06:56 AM
by
Kim Peterson

"Grand Theft Auto IV" comes out April 29, and I can't wait. It's the next installment in the controversial, violent, mayhem-filled series, and it will become the year's top-selling video game. Those who haven't played GTA are often mortified by the carjacking, cop-killing and other nefarious shenanigans it offers. But these games sell because above all else, they're unbelievably fun. (The new title will surely be rated "mature," so don't let the little ones get their hands on it.)
The upcoming game is a huge reason why Electronic Arts is making a major, and slightly hostile, play for GTA publisher Take-Two Interactive. EA offered $2 billion for Take-Two last month -- $26 a share, up from an earlier offer of $25 a share -- and was flatly rejected. Take-Two called the offer "the wrong price at the wrong time." Its shares, in the $16 range before EA's offer was made public, closed at $26.20 Monday.
Take-Two is smart to reject such a low offer. But how much is the company worth? A Wedbush Morgan analyst thinks EA should walk away if Take Two continues to thumb its nose. But Cowan's Doug Creutz thinks EA is justified in going as high as $32 a share. A Take-Two investor wants $33 a share.
Take-Two is being coy now, saying that EA isn't its only suitor. In an SEC filing, the company says it has received "informal indications of interest" from others, but no serious offers.
With no GTA to offer players, 2007 was a down year for the company. Revenue was $982 million but net loss was $138 million as production ramped up. Levered free cash flow was $101.6 million, and forward P/E is 17.70.
The numbers will all change when the new "GTA" debuts, and EA is trying to get in before that happens. The game, for the Xbox 360 and the PlayStation 3, is estimated to sell at least 10 million copies. To put that in perspective: the biggest-selling game in 2007 (the Xbox-only "Halo 3") had sales of 4.82 million.
Yet for all the allure of a blockbuster game series, buying Take-Two would mean taking on baggage. This is not the best run company. Take that board meeting last March where five out of six directors, including the CEO, were ousted. A month earlier, a previous CEO pled guilty to falsifying records. And the share price dropped about 20% in the past year before EA's intentions became public.
Take-Two has a nice bargaining position this month as the world awaits its latest blockbuster. But the company shouldn't be too arrogant and lose EA altogether.