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Will Icahn Stake Mean a Take Two Sale?

Carl Icahn and Take Two Interactive Software are hardly strangers.

The investor raised eyebrows Thursday after reporting an11.3 percent stake in the video game publisher. Given his activist shareholder history, some took that as a sign that Take Two would soon be back on the sales block.

Carl Icahn
Shiho Fukada
Carl Icahn

It’s certainly possible — but it’s not as set in stone as many may think. Icahn has held stakes in the company twice before — in early — and mid-2007. Both times sales speculation began to bubble. And both times, Icahn sold his stake for a profit a few months later.

Icahn has bought a much bigger number of shares this time, though, calling the company “undervalued”. Additionally, he and Take Two’s chairman Strauss Zelnick are acquaintances, presumably friendly ones.

In 2004, when Icahn became the largest shareholder of Blockbuster, he sought three board seats, nominating himself and Zelnick for two of them. They both remain on the board today.

That suggests Icahn might have more influence at the company than he did at, say, Yahoo .

“We think that Mr. Icahn’s significant stake in Take-Two will allow him access to Mr. Zelnick, and we expect to see increased interest in the stock as management responds to Mr. Icahn’s suggestions about how to unlock value,” says Michael Pachter, an analyst with Wedbush Securities.

Pachter thinks Icahn intends to force the company to consider a sale, but other analysts are less certain.

“The more traditional notions of Icahn trying to force a sale, push a massive re-organization, or drive some form of financial engineering do not really make much sense in this case, as the current management team is more than open to such suggestions without having an activist push it in those directions,” says Ben Schachter of Broadpoint AmTech.

Indeed, Zelnick and the rest of the management team came to power two years ago as part of a shareholder revolt/coup that ousted the company’s existing management. One of the chief issues, ironically, was the company’s inability to make a profit when it didn’t have a “Grand Theft Auto” game releasing.

Shares of Take Two currently trade at more than 55 percent below the stock’s price when current management took over.

If Icahn is leading the charge for a sale of Take Two, the larger question is: Who would be interested in buying it these days?

Electronic Arts, which vigorously pursued the company in late 2007, isn’t likely to retread that ground, given its own faltering stock. Disney , which many observers felt was in the market to acquire a major game publisher earlier this year, is busy preparing to digest Marvel Comics — and, let’s face it, it would be a pretty awkward fit. Mickey, Donald and “Grand Theft Auto” don’t sound like a mix that would work well.

Take Two Interactive
Take Two Interactive

Activision Blizzard has the cash, but whether it has the interest is uncertain. The company has two billion dollar franchises it’s nurturing — “World of Warcraft” and “Call of Duty”. To bring on “GTA” could be risky.

Of course, if Take Two’s price is right, anyone will be interested. The company repeatedly declined EA’s $2 billion offer calling it inadequate. Today, a $26 per share offer would almost certainly be snapped up — but the economic conditions are much different.

If nothing else, the speculation will create a buzz around the stock. Indeed, Take Two shares are up 12 percent on news of Icahn’s increase stake. And given the fact that the publisher has made it very clear that it won’t make any money until fiscal 2012 at the earliest, that’s bound to make some investors happy, regardless of the ultimate outcome.

“The bottom line is that we do not know Icahn’s intentions,” says Schachter, “but we can be certain that the never-boring story that is Take Two will once again draw interminable speculation and conjecture.”

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