ATVI - Microsoft's chances of closing Activision deal raised to 70% from 50% at Citi

2023-03-26 09:00:28 ET

The probability of Microsoft ( NASDAQ: MSFT ) closing its planned $69 billion acquisition of Activision ( NASDAQ: ATVI ) was raised to 70% from $50% at Citi after the U.K.'s antitrust regulator "provisionally concluded" that the proposed deal would not reduce competition in the console gaming market.

Citi also raised its price target to $91 from $88 to reflect the higher likelihood that the $95 a share mega video game transaction will close, analyst Jason Bazinet, who has a buy rating on Activision, wrote in a note on Friday. Activision ( ATVI ) shares gained 6% on Friday to close at $84.39.

"For investors willing to own Activision through into 2024, we see $11 of upside ($95 less $84) and $2 of downside ($82 less $84)," Bazinet wrote. "In effect, Activision is akin to a very low-cost call option on the Microsoft transaction gaining approval."

The U.K.'s provisional findings on Friday came as a surprise to some M&A investors who had become concerned that the regulator was planning to block the deal. The transaction has already faced opposition in the U.S., where the Federal Trade Commission filed a lawsuit in December challenging the combination. The European Union is set to make its final decision on the acquisition in May.

"If the deal receives incremental approvals across jurisdictions (UK, EU, US), we expect investors will ascribe a higher probability to the deal closing pushing Activision closer to the $95 all-cash offer price," Bazinet wrote.

The U.K. regulatory agency didn't say whether the proposed deal would impact the cloud gaming market. The agency is slated to issue a final report on the matter by April 26.

Activision is worth $82 a share under a no deal scenario, according to Bazinet, which includes $14 a share in net cash, which the analysts suspects merger arb investors investors are not giving ATVI the benefit of its net cash under a scenario where the transaction isn't completed. Absent the cash value, Wall Street is currently pricing in a ~60% chance of a deal close, up from 40% before the U.K regulator's comments on Friday.

"If the deal gets rejected by any one of the regulators, we would not be surprised if the equity first trades to $68 (our estimated no deal value ex-cash), Bazinet wrote. "However, we would expect shares to eventually recover to $82 ($68 + $14 of cash), as we suspect fundamental investors will ascribe value to Activision’s net cash."

Earlier this month Reuters reported that Microsoft ( MSFT ) is likely headed toward European Union antitrust for the Activision ( ATVI ) deal, t hanks to its offers to license videogames to its competitors.

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