Microsoft Has A 70% Chance Of Closing The Activision Deal, Says Citigroup

Last week, the UK’s Consumer Markets Authority issued a statement saying that they do not view the deal as anti-competitive. Microsoft has alleviated concerns from the CMA regarding the availability of the Call of Duty franchise on other platforms by signing deals with other gaming companies, such as Nintendo. The availability of COD on other platforms had become a major headache in this legal battle.

This small victory for Microsoft has Wall Street saying the deal is more likely to close. Citigroup technology analyst Jason Bazinet increased the probability of the deal closing from 70% to 50% after the CMA announced its statement. The rest of Wall Street has priced in the probability of the deal closing from 40% to 60% since the CMA announcement.

Microsoft’s proposed acquisition of game publisher Activision Blizzard has faced scrutiny from regulators across the globe. In an effort to secure approval from authorities, Microsoft is actively engaging with regulators in key markets such as the US, UK, and Europe. The primary concern from antitrust authorities is that the deal could be anti-competitive and give Microsoft an unfair advantage in gaming. 

There have been concerns about the probability of the deal failing. In the last few months, Microsoft was sued by the FTC, accusing the company of anti-competitiveness. European regulators issued an antitrust warning to Microsoft in January. The CMA had originally suggested that Microsoft sell off the Call of Duty franchise as a potential remedy for the deal to be approved. 

Bazinet had raised his price target on Activision to $91 from $88, reflecting the greater chance for the deal to close. Microsoft has agreed to buy Activision Blizzard for $68.7 Billion or $95 a share. In the case the deal is canceled, he sees shares of Activision falling 24% to $68 in the short term but recovering to $82. If the deal is approved, Microsoft will acquire all shares of Activision for $95, a guaranteed premium. 

“For investors willing to own Activision through into 2024, we see $11 of upside ($95 less $84) and $2 of downside. In effect, Activision is akin to a very low-cost call option on the Microsoft transaction gaining approval.

“If the deal gets rejected by any one of the regulators, we would not be surprised if the equity first trades to $68. However, we would expect shares to eventually recover to $82, as we suspect fundamental investors will ascribe value to Activision’s net cash” – Jason Bazinet

The CMA will make its final decision on the deal in April. Other regulators in Europe are expected to release their final findings in April as well. If things go well, there is potential for the deal to close as early as June. The CMA’s decision was a major win for Microsoft and makes the deal’s approval much more likely. According to Reuters, the EU is likely to approve the deal. 

Other parties aren’t happy. Playstation boss Jim Ryan flew to Belgium to convince EU regulators to scrap the deal. He reportedly told Activision executives that he does not want to make a deal with Microsoft, only that he wishes for the deal to be canceled. Google also expressed competitiveness concerns about the deal, specifically in cloud gaming (Google shut down stadia because no one used it). 

The deal is likely to close, and Microsoft/Xbox will have a large library of IP to draw from. The Call of Duty franchise being on Xbox Game Pass could boost its user count by millions, especially at a time when subscription growth is slowing down. The $68.7 Billion deal could be the largest in video gaming history, dwarfing the Take Two/Zynga and Microsoft/Bethesda deals.