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Pachter drops Take-Two price target to $16.50

Monday, 15th September 2008 14:45 GMT By Patrick Garratt

If you bought into the Take-Two dream in the past few month, you might do best to hold onto your hat: Wedbush Morgan just revised its price target from $26 to $16.50.

The news comes in the wake of confirmation that buyout talks between the GTA publisher and EA are now officially over.

“Notwithstanding significantly better than expected Q3 results, we continue to question the sustainability of earnings, and wonder about the potential for a ‘bidding war’ to attract several key employees,” said WM analyst Michael Pachter.

See the full note after the link.

Take-Two Interactive Software (TTWO-HOLD): Notwithstanding Grand Q3 Results, We Expect GTA IV Aura to Fade: Withdrawal of EA’s $25.74/Share Offer Suggests Shares Will Find Equilibrium; Lowering Price Target To $16.50

* Following the completion of due diligence and a presentation from Take-Two management, EA withdrew its $25.74/share offer to buy Take-Two.
* Notwithstanding significantly better than expected Q3 results, we continue to question the sustainability of earnings, and wonder about the potential for a “bidding war” to attract several key employees.
* We think that Take-Two’s results next year will be negatively impacted by a decline in GTA sales, and expect revenues from the game to be approximately half as great next year.
* We also believe that Take-Two’s balance sheet will require higher reserve and lower capitalized software balances next year, further depressing earnings.
* We are maintaining our FY:08 estimates for non-GAAP EPS of $2.08 (excluding $0.81/share in stock comp and other charges), and for FY:09 pro forma EPS estimate of $1.10. However, these figures do not reflect federal income taxes, meaning that comparisons to peers are flawed.
* Should the Take-Two takeover story be over, it should be valued on fundamentals.
* Maintaining HOLD, and lowering our price target to $16.50 from $26, based on a forward multiple of 13.5x estimated sustainable EPS of $0.90 (fully-taxed) plus $4.50/share in cash.

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