Pessimistic Pachter pooh-poohs Take-Two takeover talk

Analyst raises estimates slightly on strength of BioShock, release of Manhunt 2, but says investor confidence is misplaced.


Manhunt 2

Anyone who has followed the business fortunes of Take-Two Interactive in recent years understands what a rollercoaster ride the publisher has provided for investors. Recently, the company's shareholders got a good scare when the company moved its highly anticipated Grand Theft Auto IV from its previously announced October release to next year.

However, since that time, the company has seen a pair of positive events. A revised edition of Rockstar's Manhunt 2 received an M for Mature rating, and the release of 2K Boston's critically acclaimed BioShock pushed the company's stock price up significantly. In light of the good news, Wedbush Morgan Securities analyst Michael Pachter raised his revenue estimates for the publisher, but cautioned his clients that he still doesn't believe Take-Two is a great investment right now.

"Notwithstanding the likely success of such games as BioShock, the company doesn't appear to be able to make much money from its everyday business," Pachter said. "And as we have said repeatedly, we expect no meaningful change to the business so long as the company continues to produce money-losing sports games."

While Pachter raised his BioShock shipment estimates from 1.3 million copies to 2 million, and factored an initial shipment of 500,000 copies of Manhunt 2 into his projections, he also lowered expectations for a number of other titles. Specifically, Pachter reduced his estimated reorders for Fantastic Four: Rise of the Silver Surfer, All-Pro Football 2K8, Major League Baseball 2K7, and The Bigs, saying those games have combined for only 1.5 million copies sold. Overall, he moved his revenue estimate for the company's fourth fiscal quarter to $300 million, up slightly from $292 million.

Pachter also poked holes in a couple notions about future success for the company. Specifically, he tracked the company's stock surrounding the releases of the three major PlayStation 2 Grand Theft Auto games. While the release of Grand Theft Auto III provided the stock with a boost, neither Vice City nor San Andreas created a disproportionately high return on investment in the publisher.

Pachter also addressed--and dismissed--continued speculation that Take-Two is ripe for acquisition. Specifically, he shot down a theory that Electronic Arts might absorb its longtime rival. He said EA's reserved corporate culture would not mesh well with a company whose biggest games have prominently featured risqué content. He added that EA's track record shows the company's mergers and acquisitions strategy to be on a much smaller scale. In addition to holding back when properties like Juiced, Stuntman, Turok, and all of Eidos were up for grabs, EA's previous console and PC gaming acquisitions covered companies that could be purchased for under $100 million, like DICE, Mythic, and Criterion.

"We remain unprepared to express confidence in Take-Two management until we see some positive results," Pachter said. "We think that new management is doing many things right, but continue to believe that several structural obstacles remain... Until we see evidence of better controls over work in process and greater diligence in project selection, we are not confident that the company will gain market share in future years."

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