Pachter: Take-Two To Reject Higher EA Bid

Following the release of Take-Two's second quarter results, Wedbush Morgan analyst Michael Pachter has remained skeptical of the company's long term prospects despite the success of GTA, and says the company will likely reject a higher bid from EA, before settling on a friendly bargain once other suitors materialize. While GTA managed to double Take-Two's revenue and profits for the quarter with 8.5 million copies sold, Pachter says that pace is highly unlikely to continue, noting that by the publisher's own calculations, 2.5 million units were being held in retailer inventory as of a week ago. "By our estimates, the 8.5 million GTA units represent an attach rate of around 32% of the 26 million combined Xbox 360 and PS3 consoles that have been sold so far in Take-Two's addressable market," said Pachter. "By our reckoning," he continued, "Microsoft and Sony will likely sell another 7 - 7.5 million combined consoles [by the end of 2008]. Should GTA continue to attach at a 32% rate, the company can expect to sell another 2.5 million units during the remainder of the fiscal year, or about the amount remaining in retail inventory at the end of May." "The performance of GTA IV is not a surprise, and the performance of the remainder of Take-Two's business is equally unsurprising," he concluded, saying that once Take-Two sells through its estimated 12 million copies this year, that performance will be "difficult to exceed next year." Instead, Pachter says that at the same attach rate, the company should only sell through an estimated 6 million units of the game in 2009. Finally, looking at the continuing story of EA's bid for Take-Two, Pachter says he believes EA will get FTC approval in the next two months, will try to complete a deal by September, and, even if EA ups its bid "by a modest amount (likely $2 or so), and attempt to complete a friendly deal," Take-Two management will reject the deal. "Ultimately, we think EA will make a deal happen," he continues. "We believe that once EA walks away and no other bidders materialize, it will be able to allow all parties to cool their heels, and will be able to come back and complete the deal at a reasonable price" -- concluding that "Take-Two shareholders should expect a $27.54 offer."