ATVI - Buy Activision as it could become activist target amid Microsoft deal trouble - analyst

Investors should buy Activision ( NASDAQ: ATVI ) even as there's increasing fear that regulators could block Microsoft's ( NASDAQ: MSFT ) planned $69 acquisition of the videogame giant, according to United First Partners.

Activist investors could look to pressure Activision ( ATVI ), especially as the company is set to receive a $3 billion reverse termination fee for the Microsoft ( MSFT ) deal after April 18, prior to when the UK'S Phase 2 deadline for its review of the deal is set to expire on April 26, UFP's Larry Feldman wrote in a note on Wednesday.

The note comes amid speculation early last week that Activision ( ATVI ) may have hired Morgan Stanley for activism defense. Morgan Stanley went restricted on ATVI earlier this month and  it's unclear why. There's some rumors that potentially the bank was hired for activism defense , CNBC's David Faber said on the business network last Tuesday. He said activist Elliott has been mentioned as a possible name.

"An activist could help ensure ATVI management remain focused on delivering strong returns for its shareholders, and that prudent capital allocation decisions are taken subsequent to a failed-MSFT deal scenario," Feldman wrote.  "Our view is supported by the fact that ATVI has hired an additional advisor in the days immediately prior to the 2023 board nomination window opening on February 13 (the nomination period closes March 15)."

With ATVI's "significant" net cash position, as well as the potential $3 billion from the reverse termination fee, an activist may come in to ensure that the company is focused on returning capital to holders in a "prompt and orderly" manner, according to UFP's Feldman.

UFP revised its fundamental valuation for Activision ( ATVI ) and their model now assumes a $6 billion share repurchase program is implemented in Q2 and finished in Q4 that repurchaseS 10% of the company's basic outstanding shares, resulting in an equity value of ~$83 a share. Using a DCF framework, ATVI's DCF-implied equity value is ~$86 a share.

Also see from Tuesday, Microsoft's ( MSFT ) Activision deal may be reaching its critical moments in Europe, following Tuesday's closed-door hearing with European Union regulators over whether the deal presents too many anticompetitive concerns .

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