Another Chance To Dip Into Take Two Interactive: Convertible Bond Drama

| About: Take-Two Interactive (TTWO)

The market might have missed a few points on the senior convertible notes issued today by Take Two Interactive (NASDAQ:TTWO).

On May 28, 2009, Take Two Interactive (TTWO) issued $138 million worth of senior convertibles. They mature June 1, 2014 at 4.375% interest per year, with a conversion clause that the bond holders can redeem their notes for stock at 93.6768 shares per $1,000 of notes they hold.

As per the release by TTWO:

The initial conversion price represents a conversion premium of 25% over the last reported sale price of the common stock of $8.54 per share.


The bondholders basically lent TTWO $120 million in exchange for 4.375% interest per year. They also have the ability at expiration to exchange their notes for shares, which if you work out the above conversion ratio of trading in $1,000 worth of notes for 93.6768 shares, they are essentially purchasing shares at $10.675 if they chose to take shares instead of their principle at the notes maturity.

This is essentially a call option offered to the bond holders to take advantage of any upside a stock has to offer in exchange to the risk of lending to the company.

We are trading at $15.37 today, even after a 8.57% drop.

Today, TTWO did 2 things:

1) They are proposing an issuing of $250 million of senior convertible maturing 2018. We don't know what interest or conversion price they will be offering until the issue is completed.

2) They redeemed that 2014 senior convertible issue for $1,202.89 per $1,000.


First, TTWO is raising cash to pay off the 2014 convertible. It is going to cost them $166 million to do so. They are raising an additional $84 million dollars.

Second, they are redeeming the 2014 senior convertible bonds for a premium. This prevents bondholders from converting their bonds into stock in June 1, 2014.

What is happening:

Management has said:
1) TTWO will be profitable going forward
2) Shares will be bought back
3) They are positive on the industry's outlook

Today's redemption of the 2014 senior bonds prevents bondholders from requesting stock from TTWO to be issued at $10.675. This prevents dilution to the existing shareholders as long as the stock price stays above this conversion price level, which they believe it will.

It also gives them another $80 million dollars to work with. And we already know they want to buy back shares. This is already on top of the $400+ million cash pile they have on their balance sheet.

We also know in around a quarter's time, TTWO's creme-de-la-creme of "Grand Theft Auto 5" will be released, generating a massive cash influx in the coming 2 quarters.

The Balance Sheet:

At the moment, TTWO has ~$400 million cash on $335 million long term liabilities.

Post debt issue, $138 million of old 2014 senior convertibles redeemed, and $250 million issued, adding another $112 million to their long term liabilities.

From the $250 million they will raise, they will spend $166 million to redeem the 2014 senior convertibles, adding another $84 million to their cash reserves.

Thus, post issue, their cash will be sitting at around $485 million on long-term liabilities of $450 million. As an added bonus, the interest of the long-term debt should also be at a much more favorable rate today.

What they might do:

TTWO has already projected a loss for the coming quarter of around $0.55 to $0.70 per share. This equates to around $50-60 million dollars.

Management has now prevented a massive common shareholder dilution with the 2014 bond redemption, and to me this indicates preparation to continue their corporate consolidation.

Factoring this coming quarter's loss of $50-60 million, they would still be sitting on $420 million of cash post bond issuance. With short-term liabilities sitting at around $300 million, TTWO could well finance a buyback in the caliber of $200+ million without severely stressing the company's liquidity. On top of that, the GTA5 quarter is right around the corner, which should provide massive cashflow into the company shortly after.

Management has already approved of a 7.5 million shares buyback, which at today's prices would equate to $115 million dollars. A 7.5 million share buyback represents 8.3% of the company's shares outstanding.

Even if they do not increase their buyback, the company would be able to complete this buyback and still keep enough cash to meet short-term liabilities in its entirety.

We feel the company is well positioned to increase their share buyback if they do wish, and today's senior note issue suggests the company is fortifying their balance sheet to do so.

If they were to buyback shares at today's closing price of $15.37, a $200 million buyback would represent around 15% of the shares outstanding. Post-buyback under this scenario could see 2013's projected profits of $2.25 per share to increase to around $2.70 per share.

In my opinion, the debt issue and today's massive pullback offer a very compelling buying opportunity to enter TTWO at a time of fear in the market. The company's fundamentals have not changed, and today's drop is a severe overreaction to what could be a powerful catalyst for much higher share prices.

Disclosure: I am long TTWO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.