GTA publisher Take-Two gets codemasters for a steal

Photo: Screenshot of Ford Mustangs racing in Codemasters DIRT5 video game.

British video game company Codemasters announced on 6 November that US giant Take-Two Interactive would be swallowing it up for almost $1bn in a mixture of cash and Take-Two shares. The terms of offer were revealed on 10 November, with shareholders in the specialist racing games company due to receive 120p per share and 0.02834 new Take-Two shares. On the day of the announcement, this valued Codemasters shares at 485p each, or 464p on 9 November just before the details of the acquisition were announced. Codemasters shares are likely to trade in a range now partly as a function of Take-Two’s stock price.

I’ve written a few times recently about Codemasters, and am surprised by the Take-Two takeover, especially since Codies has only just got the acquisition of Slightly Mad Studios under its belt. Unfortunately, I misjudged and mistimed this investment and took the decision to sell some of my holding at 360p a share at the end of September. I felt that the contribution from Slightly Mad Studios and their latest two video games, Project CARS 3 and Fast & Furious Crossroads, wasn’t strong enough. I preempted the trading update at the start of October with my own research on the popularity and ratings of the games and didn’t expect Codemasters more generally to perform so strongly.

Undervalued?

It goes without saying that I’d like the Take-Two purchase price to be higher. I’m not at all concerned about receiving Take-Two shares, which I’ve seen some investors complain about because of their sterling-based portfolios. In fact, I’ve previously held shares in Take-Two Interactive and love titles such as GTA, which are true classics and generate enormous revenue for the NASDAQ-listed company. No, I’m feeling a bit of case of sour grapes given that I sold out a big chunk of my holding at a price £1 less than the offer.

So is Take-Two’s offer for Codemasters a fair offer? Let’s stack up Codemasters against some of its peers in the video games industry, listed in London:

CompanyP/E
Codemasters58.55
Frontier Developments71.70
Team1752.31
P/E (TTM) according to FT market data on 13 November.

For another comparison, what about putting Codemasters up against a video game ETF (one which I hold in my portfolio), and comparing it with Take-Two itself?

CompanyP/E
Take-Two42.37
VanEck Vectors Video Gaming and eSports UCITS ETF33.86
P/E (TTM) according to FT market data, and via VanEck Vectors factsheet on 13 November.

It appears that Codemasters fits in somewhere in the middle between British peers Frontier Developments and Team17. These two companies are slightly bigger than Codemasters, with market capitalisations of around £1bn each. In comparison to Take-Two and the ETF, Codemasters is more richly valued, when referring to P/E. This is maybe as you’d expect with a much bigger video games company of over $20bn in market capitalisation, with a wider portfolio of games and more consistent revenues, and not the same potential for higher earnings in the future, in contrast to a smaller, more agile company like Codemasters. The ETF contains semiconductor companies related to the video games industry, so it isn’t surprising that the P/E ratio differs greatly, but it provides an interesting floor for P/E comparisons.

For this very simplistic exercise, it seems Codemasters could be worth more than Take-Two’s offer, if we used Frontier Developments as a yardstick. The two companies are quite different – Frontier focuses on simulation games, and Codemasters on racing games. But there are plenty of common threads – both develop their own IP, as well as work on licensed games, they both concentrate on building communities around their games and try to increase revenues through add-ons and additional content.

Juicy incentives

So, will shareholders agree to this Grand Theft Auto and let Take-Two gobble up Codemasters? 75% of Codemasters shareholders have to agree to the acquisition, and all of those >1% holders are being revealed through the regulatory announcements now, as various Form 8.3s are filed. One golden nugget of information revealed in the details of the acquisition are the incentives offered to Codemasters management to get the sale through.

PersonNumber of restricted stock unitsValue
Frank Sagnier (CEO)186,667£905,334.95
Rashid Varachia (CFO)140,000£679,000
Jonathan Bunney (SVP)210,000£1,018,500
Clive Moody (SVP)210,000£1,018,500
Other Codemasters employees489,886£2,375,947.1
Incentivisation arrangements, according to Take-Two offer.

Almost £6m of incentives and over £1m each to the two senior vice presidents, curiously, a little bit more than the CEO’s getting from the deal.

The Daily Mail published an article on 11 November about a supposed investor backlash over the deal, saying Sagnier would net £15.7m from the deal, with Varachia taking £7.1m. But I believe these figures are in relation to their current existing shareholding, not the additional incentive offered by Take-Two.

Furthermore, the article cites a portfolio manager from Columbia Threadneedle, described as a top 15 shareholder, suggesting that the valuation isn’t high enough and there may be rival bids. Threadneedle is interested in 2.3% of Codemasters shares, according to a regulatory filing on 11 November, and they purchased almost £230,000 worth of Codemasters stock for 453p a share. The investment firm is also interested in Take-Two shares and holds 1.48% of the US company’s stock.

I’m not sure whether the major shareholders will push for a higher price or acecpt the offer. But these juicy incentives are certainly likely to act as strong motivation for management to get all the shareholders on board. Sagnier, Varachia and other senior management are expected to stay at Codemasters post-acquisition, according to the details of the offer.

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