Why Take-Two Interactive (TTWO) Is Buying Zynga (ZNGA) For $12.7 Billion

By Amit Chowdhry ● Jan 10, 2022
  • Take-Two Interactive (NASDAQ: TTWO) announced it is buying Zynga (NASDAQ: ZNGA) in a deal valued at $12.7 billion. These are the details.

Take-Two Interactive (NASDAQ: TTWO) and Zynga (NASDAQ: ZNGA), two leaders in interactive and mobile entertainment, announced today that they have entered into a definitive agreement under which Take-Two will buy all of the outstanding shares of Zynga in a cash and stock transaction valued at $9.861 per Zynga share, based on the market close as of January 7, 2022, with a total enterprise value of approximately $12.7 billion.

Under the deal terms and subject to the conditions of the agreement, Zynga stockholders will receive $3.50 in cash and $6.361 in shares of Take-Two common stock for each share of Zynga common stock outstanding at the closing of the deal. And the purchase price represents a premium of 64% to Zynga’s closing share price on January 7, 2022.

This combination unifies 2 global leaders in the interactive entertainment business and establishes Take-Two as one of the largest and most diversified mobile game publishers in the industry, with $6.1 billion in pro-forma Net Bookings for the trailing twelve-month period ended September 30, 2021.

Both companies created and expanded iconic franchises, which will combine to form one of the largest and most diverse portfolios of intellectual properties in the sector. For example, Take-Two’s labels included Grand Theft Auto, Red Dead Redemption, Midnight Club, NBA 2K, BioShock, Borderlands, Civilization, Mafia, and Kerbal Space Program, while Zynga’s portfolio includes renowned titles like CSR Racing, Empires & Puzzles, FarmVille, Golf Rival, Hair Challenge, Harry Potter: Puzzles & Spells, High Heels!, Merge Dragons!, Toon Blast, Toy Blast, Words With Friends, and Zynga Poker.

Strategic Rationale/Stockholder Value Creation

As Zynga’s stockholders receive approximately 64.5% of the transaction consideration in Take-Two stock, both groups of stockholders will benefit from the combined company’s greater scale, enhanced financial profile, and the synergies created through the transaction. And the combined company is well-positioned to capitalize on the interactive entertainment industry’s strong tailwinds, including a leadership position in mobile. The video game sector has experienced rapid growth over the last few years and is now the largest vertical in the entertainment industry. And mobile gaming is the fastest-growing segment within the industry with an estimated $136 billion in gross bookings in 2021 along with an expected compound annual growth rate of 8% over the next 3 years.

The deal is expected to establish Take-Two as a leader in mobile gaming with mobile expected to comprise over 50% of its Net Bookings in Fiscal Year 2023 (as compared to an estimated 12% in the Fiscal Year 2022). The deal will bolster Take-Two’s mobile offerings, which include popular games such as Dragon City, Monster Legends, Top Eleven, Two Dots, and WWE SuperCard, and consist of a diverse array of titles that focus on many of the most popular genres in mobile gaming, including casual, hyper-casual, lifestyle, mid-core, puzzle, social casino, and sports games.

The combined entity has a significantly greater scale with $6.1 billion in Net Bookings, and $769 million in Adjusted Unrestricted Operating Cash Flow on a pro-forma basis for the trailing twelve-month period ended September 30, 2021. Going forward, the combined company is expected to deliver a 14% compound annual growth rate for Net Bookings (excluding the annual Net Bookings opportunities and any future acquisitions) over the three-year period from Take-Two’s Fiscal Years 2021 through 2024.

The addition of Zynga’s mobile titles will expand the company’s base of Recurrent Consumer Spending (RCS). And through the addition of Zynga’s mobile business, particularly its diversified portfolio of live services and upcoming pipeline of new releases, Take-Two will increase its sources of RCS, a highly-attractive revenue stream that helps reduce volatility across reporting periods that has historically been driven by the cadence of Take-Two’s console and PC release slate.

Take-Two has also identified over $500 million of incremental annual Net Bookings opportunities to unlock over time, driven by:

1.) Creation of new mobile games for many of the iconic franchises within Take-Two’s portfolio of intellectual property. And Take-Two has an extensive catalog of commercially and critically successful console and PC titles with engaged and loyal communities of players, and there is a meaningful opportunity to create mobile games and new cross-platform experiences for many of these properties. Zynga’s nearly 3,000 employees include highly-talented mobile developers — paving the way for Take-Two to accelerate this strategic initiative and introduce its iconic intellectual properties across the fastest-growing platform in the industry.

2.) The ability to optimize RCS by utilizing the collective knowledge across both companies. And both Take-Two and Zynga have extensive capabilities to engage players through live operations (LiveOps) and RCS initiatives. And by combining resources and proven acumen, the teams at Take-Two and Zynga will deploy best-in-class practices throughout the organization to enhance and grow existing titles across the portfolio. The key opportunities include cross-marketing through a larger, shared customer database and improving game economies through more effective data analytics and machine learning models.

3.) The other strategic benefits include the use of Zynga’s Chartboost advertising platform — which will improve new user acquisition through better audience targeting and optimize mobile advertising inventory to achieve greater yields; geographic expansion into growth markets across Asia, including India, and the Middle East, among other regions; and an enhanced focus on technological innovation and new business models that will utilize the collective knowledge of forward-thinking talent.

4.) Take-Two expects approximately $100 million of annual cost synergies within the first 2 years after closing, primarily driven by the rationalization of duplicative overhead including corporate general and administrative expenses and public company costs, and the benefit of scale efficiencies across the enterprise.

5.) The deal is structured to maintain a strong balance sheet, including significant annual cash generation. And the combined company’s strategic and financial flexibility is expected to be greater than each company on a standalone basis, providing Take-Two with the financial resources to continue to invest in talent, development, and innovation, while also pursuing select inorganic growth opportunities.

Leadership

At the close of the deal, Strauss Zelnick will continue to serve as Chairman and CEO, and the management team of Take-Two will continue to lead the combined company. And Zynga’s management team led by Frank Gibeau and Zynga’s President of Publishing Bernard Kim will drive the strategic direction for Take-Two’s mobile efforts and will oversee the integration, and day-to-day operations of the combined Zynga and T2 Mobile Games business, which will operate under the Zynga brand as its own label within the company. Plus Take-Two will expand its Board of Directors to 10 members upon the closing of the transaction to add two members from Zynga’s Board of Directors.

Terms of the Acquisition

Zynga stockholders are going to receive $3.50 in cash and $6.361 in shares of Take-Two common stock for each share of Zynga common stock outstanding at the closing. The deal is valued at $9.861 per share of Zynga common stock based on the market closing as of January 7, 2022, implying an enterprise value of approximately $12.7 billion.

This deal includes a collar mechanism on the equity consideration so that if Take-Two’s 20-day volume weighted average price (VWAP) ending on the third trading day prior to closing is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration value of $9.86 per Zynga share (including $6.36 of equity value based on that VWAP and $3.50 in cash). And if the VWAP exceeds the higher end of that range, the exchange ratio would be 0.0350 per share, and if the VWAP falls below the lower end of that range, the exchange ratio would be 0.0406 per share.

Within the collar range, the final number of Take-Two shares estimated to be issued on a fully diluted basis will range between approximately 50.3 million and 58.5 million shares. And upon closing of the transaction, the current Take-Two stockholders will own between 67.2% and 70.4%, and current Zynga stockholders are expected to own between 29.6% and 32.8% of the combined company on a fully diluted basis, respectively, including the shares associated with the expected settlement of Zynga’s two outstanding series of convertible notes due 2024 and 2026.

As part of the deal, Take-Two has received committed financing of $2.7 billion from J.P. Morgan and intends to fund the cash component of the transaction through a combination of cash from its balance sheet as well as proceeds of new debt issuance.

The merger agreement also provides for a “go-shop” provision under which Zynga and its Board of Directors may actively solicit, receive, evaluate, and potentially enter negotiations with parties that offer alternative proposals during a 45-day period following the execution date of the definitive agreement, expiring on February 24, 2022. There can be no assurance this process will result in a superior proposal.

Zynga does not plan to disclose developments about this process unless and until its Board of Directors has made a decision with respect to any potential superior proposal.

KEY QUOTES:

“We are thrilled to announce our transformative transaction with Zynga, which significantly diversifies our business and establishes our leadership position in mobile, the fastest-growing segment of the interactive entertainment industry. This strategic combination brings together our best-in-class console and PC franchises, with a market-leading, diversified mobile publishing platform that has a rich history of innovation and creativity. Zynga also has a highly talented and deeply experienced team, and we look forward to welcoming them into the Take-Two family in the coming months. As we combine our complementary businesses and operate at a much larger scale, we believe that we will deliver significant value to both sets of stockholders, including $100 million of annual cost synergies within the first two years post-closing and at least $500 million of annual Net Bookings opportunities over time.”

— Strauss Zelnick, Chairman and CEO of Take-Two

“Combining Zynga’s expertise in mobile and next-generation platforms with Take-Two’s best-in-class capabilities and intellectual property will enable us to further advance our mission to connect the world through games while achieving significant growth and synergies together. I am proud of our team’s hard work to deliver a strong finish to 2021, with one of the best performances in Zynga’s history. We are incredibly excited to have found a partner in Take-Two that shares our commitment to investing in our players, amplifying our creative culture, and generating more value for stockholders. With this transformative transaction, we begin a new journey which will allow us to create even better games, reach larger audiences and achieve significant growth as a leader in the next era of gaming.”

— Frank Gibeau, CEO of Zynga