Electronic Arts lowers bid for Take-Two Interactive, but observers see U-turn ahead

By Paul A. Harris

St. Louis, April 18 - Take-Two Interactive Software Inc. shareholders backed management's agenda in a vote Tuesday, running counter to the apparent wishes and counsel of John S. Riccitiello CEO of Electronic Arts Inc., which is in the market with a hostile bid for Take-Two.

Take-Two shareholders voted in favor of a proposal to increase the company's incentive stock plan by 2 million shares. Under the terms of the amendment ZelnickMedia Corp. will get 1.5 million of the new shares for managing the company.

Faster than you can say "Grand Theft Auto" (Take-Two's flagship video game, as it happens, the fourth version of which is set to be released on April 29), Electronic Arts lowered its cash bid for Take-Two's shares to $25.74 from $26.00, although the all-in price, factoring the new shares, remains at approximately $2 billion.

EA also extended the deadline for the tender, which had been set to expire on Friday. The new deadline is May 16.

In a Friday press release Take-Two engaged in a bit of nose-thumbing at the downwardly revised offer.

"As reported by EA, only 6,432,787 of Take-Two's outstanding shares, or approximately 8.3% of the total, tendered into EA's offer as of 5 p.m. Eastern time on April 17, 2008.

"The minuscule number of shares tendered, as well as the strong vote in favor of the proposals presented at our annual meeting, offer indisputable evidence that our stockholders regard our efforts to enhance Take-Two's stockholder value as superior to the EA offer," said Strauss Zelnick, board chairman of Take-Two.

"This is the same highly conditional proposal that EA offered Take-Two stockholders on March 13, 2008, which our Board of Directors thoroughly reviewed and unanimously determined to be inadequate and contrary to the best interests of Take-Two's stockholders. Take-Two's board of directors has maintained from the beginning, and continues to believe, that EA's proposal undervalues our company. It undervalued the company at $26 per share, and it certainly undervalues Take-Two at $25.74."

Electronic Arts, in its press release, merely stated that it continues to believe that the offer price is full and fair, and that a transaction between Take-Two and Electronic Arts is the most compelling combination financially, strategically and operationally for all parties.

U-turn ahead

While market sources who spoke to Prospect News on Friday had no difficulty parsing the mathematics of Electronic Arts' downwardly revised bid, all seemed slightly puzzled at how Electronic Arts will get from its present 8.3% stake in Take-Two to its apparent goal of 50%.

Sources continued to suggest that Electronic Arts' bid, notwithstanding the fact that it actually decreased on Friday, ultimately will go higher.

"I don't think more people are going to be tendering for shares at the lower price," said a special situations equities analyst.

"If you look at Thursday night's vote, 77% of the shareholders approved re-election for the board. That's basically saying that they stand by the belief that management should hold out, and that Electronic Arts' offer undervalues the company."

Meanwhile an equities analyst who covers the electronic gaming and entertainment sector said that there is a widespread perception that Electronic Arts will ultimately sweeten its cash bid by around 10%.

"Obviously getting to 50% [of outstanding Take-Two shares] will be more difficult [for Electronic Arts] than it was before last night's meeting," the source said, but added that it is not impossible that Electronic Arts would just walk away from the deal.

"They may raise the offer," the analyst reasoned.

"But they may pull it."

Blowout priced in

Another analyst in the electronic gaming space, also speaking off the record, splashed a bit of cold water on the notion that a blowout release of Take-Two's highly anticipated Grand Theft Auto IV video game, on April 29, would increase that company's leverage in an eventual deal with Electronic Arts.

"A blowout release is already priced in," the analyst said.

In any case Take-Two (Nasdaq: TTWO) shares closed the Friday session at $25.98, $0.24 above Electronic Arts' revised bid and just 2 cents below the original $26 per share offer. Take-Two was up 0.50% or $0.13 on the day.

Electronic Arts (Nasdaq: ERTS) shares gained 1.07%, or $0.55, on Friday, to close at $52.01.

With cheese

Friday also saw an exchange of letters between Wendy's International Inc. and activist shareholder Trian Fund Management, LP.

In its letter Trian wrote: "As a large shareholder of Wendy's, Trian is very concerned about the current direction of Wendy's. On April 17, 2008, Trian and Triarc were informed that the Wendy's special committee had rejected two acquisition proposals made by Trian and Triarc. One proposal called for the combination of Wendy's and Arby's while the other involved an acquisition of 100% of Wendy's for over $900 million in cash with the balance in stock. Our proposals would have required the approval of the shareholders on each side of the transaction and neither of the proposals was conditioned on the receipt of third party financing. Our most recent proposals were summarily rejected in less than 24 hours.

"If the special committee now intends to pursue a transaction with another party, such as the sale of a minority equity interest, we urge the board to ensure that any alternative transaction be subject to the approval of Wendy's shareholders and not just the members of the special committee.

"If shareholders approve a different transaction after having been afforded the opportunity to consider the benefits of the transactions we had proposed, Trian will abide by the will of its fellow shareholders. However, before any transaction is considered, shareholders should be fully updated on the current financial condition of the company - including sales, profits and margins. The company has publicly stated that it plans to announce first quarter results on April 25 and we expect the company will not take any action prior to this announcement.

Wendy's responded with its own letter, stating: "Despite our determination to keep the special committee's work confidential, and thus free from the influence of interested parties, I cannot allow further misleading statements to go unaddressed in the public record."

Wendy's went on to state "...over the nearly nine months since you first publicly announced your interest in buying Wendy's for up to $41 per share, your private actions and public statements have been inconsistent. Most recently, in your latest public letter this morning, you noted that you had made a proposal for the combination of Wendy's and Arby's. We believe that is very misleading to our shareholders unless they also know that the value you ascribed to Wendy's in such proposal was significantly below a level we had previously told you very clearly would be unacceptable. That fact is important to our shareholders' judgment about the sincerity of your claimed efforts."

Wendy's (NYSE: WEN) shares gained 1.12% on Friday to close at $25.38, $0.28 higher.

Friday's special situations unfolded against a backdrop of strong positive moves in the three major U.S. stock indexes.

The Nasdaq gained the most ground, 2.61%, closing 61.14 points higher at 2,402.97. Both the Dow and the S&P 500 advanced 1.81% The Dow gained 228.87 points to close at 12,849.36. The S&P 500 was up 24.77 points on the day, and closed the week at 1,390.33.

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