Timing crucial in Electronic Arts' bid for Take-Two; Delta-Northwest merger may be stuck at the gate

By Paul A. Harris

St. Louis, Feb. 28 - Take-Two Interactive Software Inc. gave up some ground on Thursday after share prices spiked earlier in the week on news that Electronic Arts Inc. made an unsolicited bid for the company of $26.00 per share.

As it happens, that's exactly where Take-Two (Nasdaq: TTWO) shares closed Thursday: $26.00, down $0.78, or 2.91%.

However Take-Two shares are still up $8.64 over last Friday's close.

An analyst said that because the newest version of Take-Two's biggest selling game, Grand Theft Auto IV, is due to be released on April 29, timing is key to both sides.

In an 8-K document filed on Feb. 24 with the Securities and Exchange Commission, Take-Two asserted that the $2 billion proposal form Electronic Arts "substantially undervalues Take-Two's robust and enviable stable of game franchises, exceptional creative talent and strong consumer loyalty.

"We believe EA's unsolicited offer is highly opportunistic and is attempting to take advantage of our upcoming release of Grand Theft Auto IV, one of the most valuable and durable franchises in the industry. Furthermore, the offer values the company at a significant discount to its public peers and does not compensate Take-Two for its intrinsic value and the substantial synergies that the proposed combination would create."

Take-Two board chairman Strauss Zelnick stated: "In addition to undervaluing key elements of our business, EA's proposal fails to recognize the value we are building through our ongoing turnaround efforts, which will further revitalize Take-Two. While we have made substantial progress already, the turnaround of our business which we initiated in June is not yet complete, and we believe its benefits have not been recognized in either our current stock price or in the value of EA's proposal."

Zelnick also asserts that the proposal "comes at absolutely the wrong time."

One market source said that therein lies the rub: Take-Two wants to hold off negotiations until after the release of its new version of Grand Theft Auto, on April 29, whereupon it will have greater leverage.

Meanwhile in an 8-K document filed on Monday, John Riccitiello, CEO of Electronic Arts, asserted that "the time is right to do the deal now.

"...Take-Two is a subscale business in an industry where global scale has become imperative. The longer we wait, the greater the risk," Riccitiello contended

The Electronic Arts CEO also stated "We place a significant value on the ability to close the transaction relatively quickly in order to realize the synergies and to allow EA's strong global publishing organization to positively impact the catalog of Grand Theft Auto IV and other titles launching ahead of the holiday season."

The market source said that it remains to be seen whether "sooner" will trump "later" in this situation.

But either way, the source added, the deal appears likely to get done.

Shares of Electronic Arts (Nasdaq: ERTS) closed slightly lower on Thursday, down $0.13, or 0.27%, at $47.23.

Parsing pilot seniority

Airlines stocks were lower on Thursday.

An analyst in the sector said that crude oil prices above $100 per barrel are not easy for the airlines to shrug off.

And, the source added, the major U.S. stock indexes all traded lower on the day.

Those factors aside, the airlines analyst added that the issue of pilot seniority could keep the merger deal between Delta Air Lines Inc. and Northwest Airlines Corp. at the gate for some time to come.

Earlier in the day a special situations equity watcher sent word that Northwest pilots are reported to be willing to go to arbitration over blending seniority lists, while Delta pilots are unwilling to go that route. Northwest pilots believe the two pilot seniority arbitration cases in the last two decades favor them, as their pilots are older than Delta's.

The airlines analyst, who has covered the sector for a quarter of a century, could not recall a merger situation in which management wouldn't go forward unless the pilots get their seniority situation figured out beforehand.

"In all the airlines mergers I've seen, you first do the merger and then you figure out how to work around the seniority issues," the source said.

Even if the pilots should agree to an arbitration process, the analyst added, history shows that given the potential outcome of anything short of a happy landing, one side or the other is apt to pull out.

The source recalled the 2005 merger between US Airways and America West, and said that although the companies have now been merged for over two years the respective pilots still haven't figured out how to merge seniority lists.

"In that case they agreed to go to arbitration," the analyst recalled. "The arbitrator reached a decision which favored one side a little more than the other. And even though the pilots agreed beforehand that they would abide by the decision, one side didn't like the answer and ultimately declined to abide by it.

"It's conceivable that the Delta and Northwest pilots could argue for two years, and not agree," the source added.

"It's a very emotional matter for the pilots.

"The fact that this management team, to avoid potential conflicts after the merger, decided it would not go forward without the agreement among the two groups of pilots, may very well lead to stalemate."

Delta (NYSE: DAL) lost $0.91, or 6.07%, on the day to close at $14.09.

Northwest (NYSE: NWA), meanwhile, fell 7.28% on Thursday, to close $1.10 lower at $14.00 per share.

Shares of US Airways Group, Inc. (NYSE: LCC) were down 4.71% at the Thursday close, giving up $0.65 to close at $13.15.

Elsewhere in the sector UAL Corp. (Nasdaq: UAUA) shares lost $1.29 to end at $31.94, 3.88% lower on the day.

Continental Airlines, Inc. (NYSE: CAL) gave up $1.85, or 6.87%, to close at $25.08.

AMR Corp. (NYSE: AMR) ended $0.73 lower to close at $13.20, down 5.24%.

Compton mulling possible sale

Calgary, Alta.-based oil and gas exploration and production company, Compton Petroleum Corp. announced in a Thursday press release that, prodded by Centennial Energy Partners, LLC which owns a 20% stake in Compton, the board of directors of Compton has appointed a special committee to review strategic alternatives, including the sale of the company.

Peter Seldin, founder and managing member of Centennial Energy, was appointed to the Compton board and the special committee.

An analyst who covers the energy space said that Seldin has been agitating for the consideration of a sale process, and added that the stock is moving on the anticipation of a sale.

The source added that there is a 50-50 chance that there will be a sale.

Shares of Compton (NYSE: CMZ) rose $0.89, or 7.95%, to close at $12.08 on Thursday.

On the Toronto exchange Compton (TSX: CMT) gained 7.76% to close at C$11.80, up C$0.85.

"It's an issue of price, and you have a lot of price in the stock," the analyst said.

"If the sale happens we think that it will happen at a price that is no better than where you are right now."

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