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Microsoft would pay $95 a share for Activision Blizzard if the transaction is completed.
Ina Fassbender/AFP via Getty Images
Activision Blizzard
stock is having its best month since January 2021, but analysts at New Street Research think Wall Street is still too worried about
Microsoft’s
$68.7 billion acquisition of the Call of Duty and World of Warcraft maker.
Activision stock (ticker: ATVI) was up 0.4% to $85.22 on Friday afternoon, putting it in position for its highest closing level since Aug. 12, 2021. The stock is up more than 11% in March, on pace for its best month since it rose 18.8% in January 2022.
At $85.22, the stock is at a discount of just $9.78 to the $95 a share Microsoft (MSFT) would pay Activision investors if the videogame megadeal can close. That gap has been as wide was $24.06 in the past year.
New Street Research analysts Blair Levin and Matt Perault wrote in a note released Friday that as of Thursday at $84.89, the price implied a 66% chance the deal closes.
“We believe that the market currently undervalues the likelihood that the MSFT-ATVI deal will close,” they wrote. “As we have said since our initial review of the deal, the most likely outcome is a negotiated settlement, where MSFT is permitted to close the deal subject to conditions.”
Barron’s recommended Activision shares in July when they were trading around $77.86. We reiterated the pick in November at $74.10 as Activison’s business prospects improved.
The NSR analysts believe the most likely outcome includes Microsoft making concessions to regulators. They said the company may need to make Call of Duty available on rival consoles for at least 10 years, while making sure the game’s features, quality, and release schedule for rival consoles are all on par with Microsoft’s own console and cloud gaming service. They expect Microsoft will need to agree to make any failures to follow through on concessions it makes enforceable in court.
“There is also a meaningful chance that the final settlement will include some commitments related to integration with other MSFT products, including its
cloud product,” they wrote.
The deal must still be approved by regulators in the U.K., European Union, and the U.S. The U.K.’s Competition and Markets Authority recently updated its preliminary findings to remove concerns that Microsoft would be incentivized to pull Call of Duty from
Sony
to reduce competition in the U.K. console market. The regulator is still considering the deal’s impact on the cloud gaming market.
The U.S. Federal Trade Commission is suing to block the deal. A Reuters report earlier this month said the European Commission viewed Microsoft’s existing concessions as addressing its concerns. The analysts think the deal getting approval in Europe and U.K. would make the FTC more likely to seek a settlement.
“If either the Commission or the United Kingdom both pursue a block, then the FTC will likely continue litigating the case,” they added. “But overall, we think a settlement is more likely than a block because MSFT can offer concessions that address many of regulators’ core concerns.”
The analysts do provide a caveat: if
Apple
(AAPL),
Amazon.com
(AMZN), or Sony announce significant deals that alter the videogame landscape, it could change how a judge views the Microsoft case.
“Those shifts might impact the likelihood of a government win in court, and thus might make the government more or less likely to proceed with litigation,” they wrote.
Write to Connor Smith at connor.smith@barrons.com