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Background
Take-Two Interactive (NASDAQ:TTWO) announced that it would acquire Zynga (ZNGA) for $ 12.7 billion, or $ 9.86 per share (64% premium to Zynga's stock Friday closing price). In my previous Zynga article, I highlight the likelihood of Zynga's acquisition due to the divergence between the intrinsic value and the market price. The acquisition price is close to my fair value of the company share, $ 10 per share. According to the acquisition agreement, Zynga shareholders receive $ 3.5 in cash and $ 6.36 in Take-Two shares for each Zynga share. Take-Two management plans to close the deal in the 1st fiscal quarter of 2023 (the 2nd calendar quarter 2022). The deal structure assumes a 45-day window for Zynga, during which it could negotiate another bid with other companies. Take-Two's CEO expects an operating synergy of $ 100 million within two years after the close and a possible $ 500 million booking opportunity. Following the close of the deal, the CEO of Zynga will become the CEO of Take-Two's mobile game division.
The deal influence on TTWO
The deal increased TTWO's presence in the mobile games market, where TTWO was less represented than its main competitors, Activision Blizzard and Electronic Arts. Take-Two is more famous for its console and PC games franchises like GTA, Red Dead Redemption, NBA. The company also has mobile games (Dragon City, Monster Legends, WWE SuperCard), but mobile games account only for 12% of TTWO's booking. Zynga represents pure exposure to mobile gaming. The company is only beginning to introduce products for the console market. The deal was already approved by the boards of directors of both companies. However, it also must be approved by the shareholders of both companies. As a result of the deal, more than 50% of Take-Two's bookings will come from mobile games and free-to-play games - the most growing segments of the video game market. According to the latest report from Newzoo, the mobile games market accounts for 52% of the total video games market. In 2021, the mobile games market is expected to grow by 7.3%, while the PC and console games market to show a year-on-year decline. I expect the mobile games market will return to double-digit growth in 2022.
The deal multiple analysis
The deal will be closed at 4.07x EV / Sales (2022) and 17.1x EV / EBITDA (2022). That is higher than the average multiples for the public companies involved in M&A in the past several years. Zynga was traded at 3.5x EV / Sales and 16x EV / EBITDA in the last several years. However, between late 2020 and early 2021, the stock was traded at higher multiples than the acquisition multiple. I also highlight that the deal is one of the largest in the industry. It surpassed the acquisition of Supercell Oy (known for the game Clash of Clans) by Tencent in 2016 for $ 8.6 billion. Let's go over some of the biggest deals in the industry. Glu Mobile was acquired by Electronic Arts for $ 2.1 billion (3.46x EV / Sales, 52.7x EV / EBITDA). King was bought by Activision Blizzard at 2.32x EV / Sales and 6.64x EV / EBITDA in 2016. Blizzard was bought by Activision at 3.05x EV / Sales and 7.29x EV / EBITDA in 2013. Among M&A transactions with public companies mentioned above, the TTWO/ZNGA transaction will be held at the highest multiples.
The possibility of the higher bid
The list of other possible acquirers can include Activision Blizzard, Electronic Arts, Tencent, and NetEase. I think that Tencent and NetEase will not compete on Zynga's acquisition due to Chinese regulator policy uncertainty regarding the video games market. Electronic Arts closed two acquisitions last year and is currently integrating its business. Activision Blizzard can afford this M&A. However ATVI can be busy with corporate conflict solving. Note that there are not many companies left in the video games sector to acquire. Let's single out Ubisoft, which trades on a lucrative level and may become an M&A target of ATVI or Netflix (taking into account the partnership for the filming of series for the company's franchises). CD Projekt Red may also be the acquisition target for Netflix. The other public companies that could be acquired are Embracer Group and Nexters. Embracer itself acts as a buyer, so it is unlikely it will put up itself for sale. Nexters went public last year through SPAC.
The final thoughts
I think Zynga's acquisition price is quite rational given my forecast of operating indicators. While there is still the possibility of a competing bid for Zynga, I believe that Take-Two will be the final buyer given the size of the deal, as not many companies will be able to afford such an acquisition. Since the acquisition price is fixed, I lower my target price from $ 10.3 to $ 9.86 (17% upside potential). Although there is the prospect for stock price growth to the target price, I sold my position in the company's shares after the acquisition news to buy more shares of ATVI, the idea of investing in which I discussed in another article.
