UPDATE 2-EA's offer for Take-Two undervalued-big investor

Mon Feb 25, 2008 6:00pm EST

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(Adds analyst quotes, closing stock price)

By Anupreeta Das

SAN FRANCISCO Feb 25 (Reuters) - U.S. video game giant Electronic Arts Inc's ERTS.O bid to buy Take-Two Interactive Software Inc (TTWO.O) for $1.9 billion undervalues the company, and shareholders are unlikely to sell at that price, an investor who owns about 5 percent of Take-Two said on Monday.

"We see Take-Two valued at around $33 a share," said Wiley Reed, a portfolio manager at Denver Investment Advisors LLC. EA's bid is for $26 a share.

Reed also said he expects Electronic Arts to raise its offer before the April 29 release of Take-Two's blockbuster game "Grand Theft Auto 4."

"This deal is going to be super-accretive to EA ... and we definitely think EA can pay up a bit more here," said Reed. "We're looking for a 33-type number."

EA made its unsolicited all-cash $1.9 billion offer public on Sunday. Take-Two rejected the offer as "inadequate" and accused EA of trying to scoop up a company in turnaround just before the publication of "Grand Theft Auto 4."

Shares of Take-Two closed up nearly 55 percent at $26.89 on the Nasdaq on Monday, indicating that investors expect EA or another bidder to make a higher offer. Meanwhile, Electronic Arts shares fell 5.2 percent to close at $47.14.

Analysts said a combination of the two makes strategic sense, and expect the deal to go through at a higher offer.

"Given the strategic sense of the combination and the compelling potential for the deal to be accretive to ERTS (Electronic Arts) shareholders at a higher price, we believe there is a good chance this deal could get done at a higher price," Cowen and Company analyst Doug Creutz said in a note to clients.

But analysts didn't think Take-Two could get too much more.

Citigroup analyst Brent Thill said he thought EA's offer was fair, and that the company may be willing to pay "slightly, but not materially higher" than its current offer.

BMO Capital Markets analyst Edward Williams told Reuters Television a negotiation might push EA to raise its $26-a-share offer, but a "material" increase -- one 25 percent or more above the current offer -- is unlikely.

Wedbush Morgan analyst Michael Pachter said the offer was "more than adequate" since Take-Two had failed to turn a profit in more than two years and its turnaround efforts had not yet borne fruit.

"We believe that EA's offer is significantly higher than the amount that would be paid by a major media company," Pachter wrote. "Other prospective bidders are simply not in the same position to value Take-Two as is EA."

Stubbornness on Take-Two's part could backfire since EA has made clear that any delay in capturing the profits from "Grand Theft Auto 4" makes Take-Two less valuable in its eyes.

"If Take-Two does not come to the negotiating table with Electronic Arts and you get more of a hostile environment to try to take over the company, I think if anything your bid is 26 or lower rather than 26 or higher, and that's where they would just try and tender for shares at whatever price it would be," Williams said.

In his offer letter, EA's chief executive, John Riccitiello, warned that other potential bidders are unlikely to pay as much for Take-Two, and a delay in accepting the proposal could withhold benefits from shareholders.

"There can be no certainty that in the future EA or any other buyer would pay the same high premium we are offering today," Riccitiello wrote. Some analysts interpreted that to mean that EA could walk away if Take-Two dithers.

But Take-Two shares could touch $33 even if EA walks away from the offer, Denver Investment's Reed said.

"We think GTA 4 (Grand Theft Auto 4) is going to show how powerful this brand is. The stock, on fundamental earnings power, will propel Take-Two to $33 even if Arts doesn't buy it," he said. (Additional reporing by Scott Hillis) (Editing by Jeffrey Benkoe, Gunna Dickson, Gary Hill)

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