Yahoo Finance Activision Bulls Wager on More Deal-Driven Gains
(Bloomberg) -- More than a year after Microsoft Corp. proposed buying Activision Blizzard Inc. for $69 billion, the video-game maker’s shares are finding fresh impetus.
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Boosted by optimism that the deal will overcome the major hurdle posed by a UK antitrust review, Activision stock has gained 8% in the last three weeks, taking it above the range that had persisted since the transaction was announced in January 2022 and narrowing the discount to the offer price.
Investors have been further encouraged by how well the company’s business is going — so well that some are speculating Activision might be in a position to negotiate a higher price should Microsoft need more time to close the deal.
“The fundamental case gives you a really strong floor in the shares,” said Doug Clinton, managing partner at Deepwater Asset Management.
This month is shaping up to be a big one for Activision. In addition to anticipated financial results, the UK Competition and Markets Authority is due to make its final decision by April 26.
While CMA approval would remove a big impediment to the transaction, Microsoft would still need clearance from the European Commission and China, in addition to overcoming a Federal Trade Commission challenge. It has a deadline of July 18 to close the deal.
The importance of the UK review was illustrated last month when the CMA narrowed the scope of its investigation to focus solely on cloud gaming, sending Activision soaring. The gain pushed the spread between the stock and the $95 a share acquisition price to the slimmest since the deal was announced.
Activision hit a closing peak of $85.59 on March 31 and has mostly held steady since. The stock rose 0.7% on Thursday.
According to Aaron Glick, a merger arbitrate strategist at Cowen & Co., last month’s move by the CMA significantly boosted sentiment about the deal closing. The market is pricing a 50% to 60% probability of it completing based on the assumption that Activision’s standalone value is around $70 to $75 a share, compared with 30% before the regulator’s announcement, he said.
Read More: Activision’s Risk-Reward Defies Microsoft Deal Doubt: Tech Watch
Meanwhile, the outlook for Activision’s business continues to brighten. In February, the Santa Monica, California-based company reported net bookings that beat Wall Street estimates and expectations are running high for Diablo IV, an action role-playing game set to be released in June.
Activision’s short-term prospects are “the most compelling of our video game coverage,” Wells Fargo analyst Brian Fitzgerald wrote in a note last week. In addition to Diablo IV, Fitzgerald is also optimistic about the release of Warzone Mobile and said Activision’s cash holdings could be deployed for acquisitions or share repurchases should the Microsoft deal fall apart.
To be sure, it’s not all plain sailing. The FTC has sued to block the transaction and a trial is set to begin on Aug. 2, the start of a lengthy process that could take months.
Yet if the lawsuit remains outstanding by the termination date, there’s a school of thought that Activision could be well placed to negotiate a higher price in exchange for extending the merger agreement, according to Cowen’s Glick.
It’s a low probability bet, but there is precedent. In 2021, Cisco Systems Inc. agreed to raise its offer for Acacia Communications Inc. by more than 60% from original deal price to close an acquisition after regulatory approvals took longer than expected.
For bulls like Deepwater’s Clinton, the stock is attractive regardless of whether the Microsoft deal goes through or not.
“If the stock wasn’t in this deal, it might be trading near the offer price on its own,” he said.
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--With assistance from Subrat Patnaik.
(Updated share price at open)
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