In his latest note to investors following Take-Two's first quarter results
, Wedbush Morgan's Michael Pachter says GTAIV
's prospects are "masking" recurring problems and an underperforming portfolio, and predicts that the publisher will cave to pressure and resume talks with EA before the GTA
"While new management is not to blame for the company's poor results," Pachter begins, "we think that its weak performance in the holiday quarter reflects the extent of the turnaround required to restore the company to consistent profitability."
In particular he notes that while software sales have grown by 58 percent over the past two years, Take-Two's own publishing sales have fallen by nearly 23 percent, adding, "this is clearly a company that is losing market share, and as we review the lineup for the balance of 2008 and 2009, we see more of the same type of games we have seen over the last three years."
Failure To Franchise
Apart from its underperforming sports lineup, Pachter says the company is failing to make good on its promise to properly "sequelize" its key franchises like Midnight Club, Max Payne, Red Dead Revolver
, with development times of up to four or five years each.
"Instead of delivering these 'franchises,'" Pachter says, "Take-Two management has promised us games like Top Spin 3, Don King Presents: Prizefighter
, and Carnival Games: Mini-Golf
. These games appear to us very much like the Manhunt, BIGS, All-Pro Football, Ghost Rider
and Fantastic Four
games of last year, when the company generated a net operating loss of more than $100 million. We think games like Civilization Revolution
and Midnight Club Los Angeles
will perform quite well in FY:08, but are reminded that games like Bioshock, The Darkness
and Carnival Games
performed quite well in FY:07."
The Auto Factor
That leaves just one glaring omission -- GTA IV
, says Pachter, and while he expects the game to ship 6 million units in its first week, and sell 9 million during the fiscal year, the game's success "will thus be responsible for more than 100% of Take-Two's earnings for the year, and the game is likely to mask the underperformance of the rest of Take-Two's portfolio."
"In summary, Take-Two is pretty much the same company it was over the past three years, but has the good fortune to have GTA IV coming out next month," Pachter concludes, and says because of this, should "jump at Electronic Arts' 'proposal' to purchase the company for $26 per share in cash."
Bid For The Near Future
Pachter envisions a scenario in which EA holds fast at its $26 per share offer, and that "in order to save face, Take-Two management will withdraw its demand that any discussions wait until after the launch of GTA IV
(conveniently scheduled 19 days after the impending shareholder vote on additional stock compensation for ZelnickMedia), and we think that management will engage in discussions with EA."
At best, Pachter says he believes EA may raise its offer to $27, as it "prefers to complete a friendly deal, and think that it is possible that Take-Two management can convince EA of the extent to which EA may have undervalued Take-Two shares," and that an offer "will be presented prior to Take-Two's scheduled annual meeting on April 10."