Take-Two Interactive (NASDAQ:TTWO) announced it would issue $200 million of convertible senior notes in a private transaction, with as much as a $30 million over-allotment. No terms were disclosed, other than that the notes were due in 2016 and that they could be converted at any time after June 1, 2016. The term is non-customary (around 4.5 years instead of 5 or 10), and the conversion feature suggests that the notes will carry a very low interest rate. We spoke to the company, who would not comment on the notes, as the offering is in progress.
In its press release, Take-Two stated that it was issuing the notes for general corporate purposes, which may include acquisitions and other strategic investments. The last time Take-Two issued notes (in May 2009), the company stated that the proceeds would be used for general corporate purposes.
Take-Two currently has $270 million in cash and $111 million in debt on its balance sheet, with the existing debt not due until 2014; it appears to us that the company will not face a cash squeeze in the foreseeable future, suggesting that an acquisition may be contemplated. Take-Two’s guidance suggests that it will earn a profit each of the next two quarters, and we expect the company to generate positive cash flow. We cannot envision any scenario where the company would run out of cash at any time in 2012, particularly taking into consideration that management has repeatedly stated it expects the company to earn “in excess of $2.00 per share” in FY:13. A review of Take-Two’s lineup in 2012 reinforces our view that the company will generate even more cash in FY:13, and leads us to conclude that the proceeds can only be intended for acquisitions or strategic investments.
We do not believe the announcement reflects any change in the release date for Grand Theft Auto V, which the company formally announced on November 3, a day after the debut of the game’s first trailer. Although the company has yet to disclose a release date, the timing of the trailer and the announcement by Rockstar reinforces our conviction that the game will be released as early as May / June 2012, although we currently have modeled a September quarter release to be conservative. Again, there are no circumstances that would lead us to conclude that today’s financing announcement is in any way related to the launch of GTA V.
Instead, we think that an acquisition is imminent, and believe Take-Two is likely exploring an investment in the mobile or social games space. We note that digitally delivered content accounted for 25% of net revenue in Q2:12, and management consistently lists digital as a component of the company’s growth strategy.
Maintaining our OUTPERFORM rating and our 12-month price target of $19, which reflects a forward multiple of 15x estimated sustainable EPS of $1.20 (fully-taxed) plus an estimated $1/share in net cash. Our multiple is in-line with the historical range, and reflects improving execution.
Michael Pachter is an analyst at Wedbush Morgan.