Why EA should take THQ
Posted
Jul 10 2009, 12:48 PM
by
Minyanville
Rating:
Since we hit the credit crunch, Wall Street has seen a number of busted deals -- ranging from the aborted Harman (HAR) merger to Microsoft's (MSFT) attempted acquisition of Yahoo (YHOO). But as an avid follower of the video-game industry, the failure of Electronic Arts (ERTS) and Take-Two Interactive (TTWO) to achieve wedded bliss was the one that caught my attention.
What did EA have to gain with Take-Two? It's simple: mature-rated content in the form of Grand Theft Auto, and increased market share in sports. But there's another potential target that would give EA what it wanted with Take-Two, and that's THQ Inc. (THQI).
THQ is best known for its World Wrestling Entertainment (WWE) games and other licensed fare from the likes of Nickelodeon (VIA) and Walt Disney's (DIS) Pixar. The company also has some solid fully owned properties including Company of Heroes and Red Faction.
THQ was riding high a couple of years ago on the backs of hits like Saints Row and Cars, but the effects of tough competition and some product-management missteps have the stock down about 80% from its April 2007 highs.
Saints Row, a Grand Theft Auto-style, open-world action title, would certainly help EA build share in the mature-rated games market. But the real kicker would be THQ's Ultimate Fighting Championship (UFC) license. The UFC is the leading brand in mixed martial arts -- a sport combining fighting disciplines such as boxing, wrestling, and jiu-jitsu. Once derided as human cockfighting by John McCain, the sport has become increasingly mainstream to the point that Bud Light (BUD) and Harley-Davidson (HOG) grace the UFC's famous octagonal cage.
Luckily for THQ, the 18- to 34-year-old male demographic that makes up a great deal of the UFC fan base likes video games. A whopping 2 million units of UFC 2009 Undisputed were shipped within 2 weeks of its May 19 release. And since this sport is still illegal in New York and Massachusetts, there's still plenty of room for growth.
EA is planning a rival title comprised mostly of non-UFC fighters. But according to a Sports Illustrated report, UFC president Dana White put the word out that fighters considering signing with EA had better think twice -- an ominous warning given the company's virtual monopoly on the sport in North America.
The solution? EA should just buy THQ. EA is sitting on $2 billion-plus in cash that isn't generating much in interest; buying THQ makes a heck of a lot more sense than leaving all that money in the bank.
EA would be partnered with the UFC -- the best promotion in the world. It would also own the development house that put together the critically acclaimed and top-selling Undisputed, which would take a lot of the risk out of the equation.
Could EA make a hit MMA game? Yes. Is that guaranteed? No.
THQ has an enterprise value of about $335 million, so EA could offer THQ shareholders a significant premium -- 50% or more -- and the deal would still make sense from a financial standpoint. For $600 million or so, EA would be getting its hands on an incredibly hot sports franchise with room for significant growth in coming years.
In fact, an extremely conservative free-cash-flow model indicates that the UFC license alone is easily worth hundreds of millions of dollars over the long term. Moreover, EA would be getting its hands on other THQ licenses -- including the cash cow WWE, and some valuable intellectual properties such as Company of Heroes. Anything that loses money or competes with an existing EA property could simply be eliminated.
The industry's only going to keep consolidating -- EA buying THQ is the next logical step.
Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Michael Comeau.
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