SNEJF - Activision Blizzard: 80% Deal Approval Chance Yet 30% Discount

Summary

• Antitrust investigations are unfolding as the regulators are now gathering the evidence.
• There is no legal reason to block the Microsoft-Activision deal.
• Regulators are likely to stop listening to Sony as it has a direct interest in disrupting the deal.
• I estimate the deal approval chance at 80%, while ATVI stock trades at a 30% discount to a buyout level.

Thesis

As time passes and antitrust investigations unfold, Activision Blizzard ( ATVI ) stock plummets to $72. Investors continue to evaluate the chances of approval of the deal with Microsoft ( MSFT ) by regional regulators.

I have covered Activision earlier, and my main thesis was that the takeover would likely be approved by all regulators as it wouldn't affect market competitiveness and Microsoft wouldn't be seen as a 'gaming monopoly.' But how high are the chances? I would say 80%/20% in favor of deal success.

Current deal status

It now has been over 10 months since the acquisition announcement. It's too early to say that something is not going according to plan. As expected, regulators begin to deeply investigate the deal.

The CMA and the EU Commission begin to collect evidence through the survey of market participants. FTC is expected to be the first out of three to release a final report by late November.

Interestingly, the deal has already received a green light from the Brazilian regulator ('CADE'). The agency stated:

Despite all the concerns about the deal, CADE's main goal is to promote the well-being of Brazilian players rather than defending the interests of certain companies or their competitors.

I honestly couldn't think of a way to phrase it better. This is precisely the entire purpose of antitrust commissions - to protect consumers.

80% approval chance: Why?

Reason 1: Good luck finding a reason

As it all comes down to formality, all three agencies will have to release a decent press release, if they reject this acquisition. The regulators would refer primarily to the size of the deal and the power Microsoft would gain through this deal.

However, repeating the thesis from my last article , there is simply no reason for this. Call of Duty, one of the biggest gaming franchises, will be on Game Pass and might become Xbox's exclusive in the future. I think this is obvious because the whole point of this deal is to close the gap with the main competitor, Sony ( SONY ), in content. But we continue to run into the same thing. There is nothing unique about Call of Duty. Moreover, there is nothing so unique in all Activision Blizzard content. The reason for Activision's financial success lies in the smart integration of in-game purchases, not in the best-in-class games selling at a premium price.

Regulators can talk about caring for gamers and that the studio's games should be present on multiple platforms, not just on Xbox. But why haven't regulators raised the issue of Sony's acquisition of Bungie then? The company could very well make the next part of the fairly popular Destiny a PS exclusive, although as with Microsoft and Call of Duty, the move is unlikely to pay off, even. So it is not clear to me how such a step can be argued.

Reason 2: Sony is the only one who has problems with it

After polling more and more new Microsoft competitors, it becomes clear that Sony is most actively protesting against the deal. This is because Sony has the most to lose from this acquisition. However, the company's statements should eventually fade into the background, since it has a direct interest in disrupting the deal.

Additionally, Microsoft has said it has tried to bring Xbox Game Pass to the PlayStation. So PS owners could access lost content, including Call of Duty, but Sony refused. Don't forget that Sony is still a leader in the gaming industry, with over 280 first and third-party exclusive games released for the PlayStation in 2021 alone, which was nearly five times as many as Xbox.

Overall, if the Xbox becomes an attractive platform for all gamers, including PlayStation brand fans, then this will be a direct reflection of the natural market competition, which Sony is likely so afraid of.

Summing up

I think that there is rather a low chance of acquisition failure. Regulators will likely just look at all the evidence, shrug their shoulders, and give the deal the green light. I rate this scenario's chances at 70-75% as public pressure may come into play. But if the deal is blocked, then Microsoft has every right to go to court. I estimate the corporation's chances of winning at 80% , given that it will be much easier for it to prove that the acquisition will likely not affect the competitiveness of the gaming market than it is for the regulator to prove otherwise.

All in all, I continue to believe that ATVI is a bet on the common sense of the regulators. However, this deal might easily be closed without their approval as Microsoft will likely win in a legal battle in my opinion. The deal should then close sometime in 2024.

30% discount

Activision stock is now down 11.66% since January 18 (Microsoft's offer date).

I still believe that it is a massive arbitrage opportunity, which gets more attractive the more it plummets.

The upside potential has reached a whopping 30%.

Thus, I reiterate my Strong Buy rating.

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