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In what amounts to the biggest deal in the history of the video gaming industry, on Monday, Take-Two (TTWO) announced it plans on acquiring Zynga (ZNGA) in a cash-and-stock deal which values the mobile gaming specialist at around $12.7 billion.
As mobile gaming currently makes up just 10% of TTWO’s total bookings, the addition would significantly boost its mobile business; mobile is the interactive entertainment industry’s fastest-growing section.
“We are not surprised by this proposed deal (maybe a little surprised it took this long),” said Baird analyst Colin Sebastian. “Zynga will bring to Take-Two a large portfolio of top mobile games, vast expertise in free-to-play monetization and ‘live events,’ and strong mobile gaming leadership team.”
Zynga’s mobile games portfolio includes “Farmville,” "Words With Friends,” “Empires & Puzzles," and "Zynga Poker."
Its intention to aqcuire Zynga for what amounted to $9.86 per share, placed a 64% purchase premium on Zynga’s share price at the time of the announcement. As such, Zynga stock surged on the news, while TTWO shares tanked by 13%. While the overall size of the deal and “concerns” over Take-Two’s own pipeline attributed to the negative market reaction, Sebastian thinks this “opportunistic deal” – Zynga shares had been on the backfoot for the past year – “makes sense given the benefits of scale and data in managing a portfolio of mobile games.”
Valuation aside, as a combined entity, the two have “identified numerous strategic initiatives.” These include a net bookings CAGR of 14% through F2024, $500 million in yearly net bookings opportunities, and annual cost synergies of $100 million within the first two years following the deal’s consummation. “Importantly,” says the 5-star analyst, “The 14% CAGR excludes the $500M potential annual bookings opportunity and any additional acquisitions.”
The deal is anticipated to close during first-quarter fiscal 2023 (ending on June 30, 2022) following which Zynga CEO Frank Gibeau and Zynga President Bernard Kim will jointly take charge of Take-Two’s mobile game initiatives.
So, great for the video game publishers, but what does it all mean for investors? Sebastian reiterated an Outperform (i.e., Buy) rating on TTWO, along with a $215 price target. This target puts the upside potential at a ~39%. (To watch Sebastian’s track record, click here)
The Street concurs. TTWO's Strong Buy consensus rating breaks down into 13 Buys, and 4 Holds. The upside potential comes in at 34%, should the average price target of $207.56 be met over the next 12 months. (See TTWO stock forecast on TipRanks)