Business Description:
Products include premium full-games, free-to-play offerings, in game-contents to purchase, and subscriptions across the 3 segments
Merger:
All cash transaction by Microsoft for $68.7 billion or $95.00/share
Expected to close in Microsoft FY23 (ending in June 2023)
Catalysts:
Rapid growth of the gaming market
Brand recognition
Arbitrage opportunity with current spread of 20%
Risks:
Concentration of revenues on a few franchises (top 3 franchises in 2021 accounted for 82% of sales)
Possible Antitrust probes on the merger
Financial Analysis:
Valuations:
My personal Biases:
Confident on the merger going through
Actively looking for merger arbitrage deals
Assumptions:
Revenue growth of 5% per year (a little below 5 last years) for the next 5 years
FCF growth of 6% per year (improving margins) for the next 5 years
Terminal growth rate of 2%
Discount rate of 10% (great company with great balance sheet)
Margin of safety of 20%
Exit Multiples based on P/FCF Ratio (20-40 in the last 10 years)
Sales 20% higher in bull case and 20% lower in bear case
Shares outstanding stays the same
This is the scenario where ATVI is a long-term investment
ATVI looks overvalued
Let’s look at the arbitrage opportunity
Expected return of 11% in a year
In case the deal doesn’t go through, the shares of ATVI are expected to drop to $60 and is a good deal
Conclusion
Great company at an overvalued price
Arbitrage opportunity with expected returns of 11%
In case the deal fails, might become an attractive long-term investment
Definitely a BUY at such a price
