Backing up the Take-Two Truck

I closed my last post, which was about Take-Two and Electronic Arts entering into a confidentiality agreement, with a cautious sentiment. I said that I was planning on maintaining my disclosed position, TTWO Sept $27.5 and $30 calls, or selling contracts as premiums rose.

There was little spike in the stock price or options premium, so I decided to load up on more calls. TTWO has now set September 4th as the date of their earnings report and conference call for the quarter ended July 31st.

TTWO made $1.52 per share in during the quarter ended in April; much of that money was made during the few days that Grand Theft Auto IV was sold during the end of that quarter. However, sales continued to be strong during this quarter and TTWO's results should reflect this. The consensus estimate for this quarter is only $.55/share, which could easily be beaten; in fact, TTWO has beaten estimates handily each of the past four quarters. Full-year predicictions (currently $1.85) also may be revised upward; so far this year, TTWO has tallied -$.41 and $1.52, for a total of +$1.11. The estimes for the next two quarters, $.55 and $.19 could be easily crushed. TTWO is releasing GTA IV in Japan in early October and on the PC in November (which falls under the next fiscal year), so sales should continue to trickle down to TTWO's bottom line.

As long as TTWO comes in at least in-line this quarter, ERTS will have to re-bid at a much higher price or admit that TTWO is too expensive for them. If ERTS does make the $1.52/share that they're expecting to tally this year, the stock trades at about a 32 P/E. ERTS's asking price of $26/share for TTWO assigns a 14 P/E. Activision-Blizzard trades at a P/E in the high 20's. ERTS cannot expect TTWO to sell out at such a discount to itself and the industry.

So I am indeed speculating as this tango proceeds. If TTWO's management has presented its material to ERTS's board already, they could forseeably make an offer before earnings to minimize the influence of the investor community's reaction on a takeover price. If TTWO reports in-line or surprises positively, shares should jump for many reasons - TTWO's shares are deeply undervalued compared to its competitors, and investors like me may think that ERTS will pony up more for the company.

Shares currently seem to be hugging the $25 level, but I'd be surprised if they stayed there for long. It's time for ERTS to sack up and make a reasonable bid, or leave TTWO alone. The lead-lined takeover cloud capped TTWO's share price as it released the best-selling media release of all time and subsequently reported unbelievable earnings. It's time for the sun to shine on TTWO.

Disclosure: Long TTWO Sept. $27.5 and $30 calls.