Activision’s rising shares show Microsoft deal on track
• Investors are optimistic video-game maker will overcome hurdle posed by UK antitrust review
ACTIVISION HIT A CLOSING PEAK OF $85.59 ON MARCH 31 AND HAS MOSTLY HELD STEADY SINCE
THE FEDERAL TRADE COMMISSION HAS SUED TO BLOCK THE TRANSACTION AND A TRIAL IS SET TO BEGIN ON AUGUST 2
More than a year after Microsoft proposed buying Activision Blizzard for $69bn, the videogame maker’s shares are finding fresh impetus.
Boosted by optimism that the deal will overcome the major hurdle posed by a UK antitrust review, Activision stock has gained 8% in the past 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.
April 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 approval would remove an impediment to the deal, 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 in March when the Competition and Markets Authority 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.
According to Aaron Glick, a merger arbitrage strategist at Cowen & Co, last month’s move by the Competition and Markets Authority 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 $70 to $75 a share, compared with 30% before the regulator’s announcement, he said.
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 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 is not all plain sailing. The Federal Trade Commission has sued to block the transaction and a trial is set to begin on August 2, the start of a process that could take months.
Yet if the lawsuit remains outstanding by the termination date, there is a school of thought that Activision could be well placed to negotiate a higher price in exchange for extending the merger agreement, according to TD Cowen’s Glick.
It is a low probability bet, but there is precedent. In 2021, Cisco Systems agreed to raise its offer for Acacia Communications more than 60% from the original deal price to close an acquisition after regulatory approvals took longer than expected.
For bulls such as 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.