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The Ratings Game: Activison stock upgraded on ‘increasingly compelling’ merger-arbitrage opportunity

Activision Blizzard Inc. shares trade about 17% below Microsoft Corp.’s agreed-upon takeover price for the company amid concerns that regulators could block the combination, but one analyst sees opportunity in that spread.

MoffettNathanson’s Clay Griffin upgraded Activision’s stock to outperform from market perform Monday, writing of merger-arbitrage potential related to the deal. While Griffin doesn’t necessarily think that the merger will close immediately, he does eventually believe that the deal will go through.

The Microsoft-Activision deal still faces its share of regulatory hurdles ahead, and Griffin said there’s some confusion about what the timeline might look like.

Activision’s stock

slipped 0.2% in morning trading Monday, to trade 16.8% below the $95/share deal price.

Activision disclosed in March that it and Microsoft

received so-called Second Requests for information from the Federal Trade Commission concerning the deal. The company explained that the Second Request extends the waiting period for 30 days after the companies substantially comply with the request, unless the FTC terminates that waiting period earlier.

Griffin noted a recent industry article from Gamespot said that Microsoft has provided the required information, and that while it was unclear whether or not Activision had, the FTC would have 30 days to decide whether or not to challenge the deal. But Griffin isn’t so sure the timeline would be that quick.

“[T]he FTC isn’t bound by some ‘use it or lose it’ ability to challenge,” he wrote. Microsoft and Activision could close their deal after the 30-day window passes, but the FTC “certainly could (and have always had the ability to) challenge deals that close after the waiting period expires.”

Representatives from Activision and Microsoft didn’t immediately respond to MarketWatch’s request for comment on whether they had complied with the requests yet.

In Griffin’s view, waiting for proper FTC approval could help the deal win the blessings of regulators in other markets that need to clear the combination.

“We believe that having a rigorous review, followed ultimately by an approval from the FTC, would be quite the feather in Microsoft’s cap as it relates to getting peer agencies around the world to bless the deal,” he wrote. “Daring the FTC to block the deal in U.S. courts…eh, not so much.”

So while Griffin doesn’t think there’s a “necessarily imminent” resolution to the issue, he still said “it’s not wrong to suggest that the Microsoft-Activision deal is entering its final stage.”

He noted that the lack of action from both parties suggests there could be “some back-and-forth and a good-faith effort” from the companies to address possible concerns. Further, he wrote that the merger hasn’t been a political target the way some recently scuttled deals have, and he doesn’t see too much of an antitrust case around it.

“Sure, Call of Duty is an important console video game,” he wrote. “Would it be enough, even if it were transformed into an Xbox exclusive, to allow Microsoft to steamroll Sony…and Nintendo…? And to such a degree as to allow it to squeeze smaller publishers and gamers alike? Highly doubtful, in our view.”

“Six months into it, with little to move our opinion about whether it will close, the return profile improves with the passage of time,” Griffin wrote. “In a market beset with macro risks, buying Activision here is an uncorrelated return opportunity that we find increasingly compelling.”

Activision’s stock has rallied 18.9% year to date, while Microsoft shares have shed 23.3% and the S&P 500 index

has lost 16.9%.

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