Pachter Pounds The Gavel On Activision Deal, Says Microsoft Prepared To Beat Regulators 'Into Submission'

Zinger Key Points
  • The regulators "all know they have a slam-dunk loser in court. They're gonna lose," Pachter says.
  • "And Microsoft is a big deep-pocketed corporation that knows it has a slam-dunk winner."

The United Kingdom's Competitions and Markets Authority has indicated the deal between Activision Blizzard Inc ATVI and Microsoft Corp MSFT could hurt competition in the space

Wedbush analyst Michael Pachter laid out why the regulatory chatter is really just noise and explained why he expects the deal to go through on Benzinga's PreMarket Prep show. 

What To Know: Activision shares are trading well below the $95 per share buyout price that investors are expected to receive following the closing of the deal with Microsoft. That's because most believe the CMA has what it needs to block the acquisition.

But "here's what's really going on," Pachter said.

The three regulatory authorities that are reviewing the deal (the CMA, the EU Commission and the FTC) are concerned that a consolidation of power will lead to a lack of competition and ultimately spur unfair price increases that price out some consumers. 

The big concern in this particular case is that Activision has a handful of games that are popular on both Microsoft's Xbox and Sony Group Corp's SONY PlayStation. If the deal were to pass, regulators fear that Microsoft would opt to make some of its games exclusive to the Xbox platform.

"Fortunately for Microsoft, they have no intention of ceasing to support PlayStation and they've said it repeatedly," Pachter told Benzinga.

"Call of Duty" is one of the most popular games in the world. Microsoft has a history of making games exclusive to Xbox, most notably with its "Halo" franchise.

Last year, shortly after the deal was announced, Microsoft Gaming CEO Phil Spencer noted that Xbox intends to honor all existing agreements, including its "desire to keep Call of Duty on PlayStation."

See Also: Regulatory Opposition Mounts Over Activision For Microsoft Deal, UK's Regulatory Watchdog Objects

Why It Matters: Microsoft wants to buy Activision because the company can't create content fast enough to be able to take a big enough piece of the pie in the booming gaming industry, Pachter said.

"What's really going on here politically ... is the three agencies all know they have a slam-dunk loser in court. They're gonna lose," the Wedbush analyst emphasized.

"And Microsoft is a big deep-pocketed corporation that knows it has a slam-dunk winner, and it's prepared to stick this out as long as it takes to beat these guys into submission," he added.

Pachter told Benzinga that Microsoft is going to reach an agreement with one of the three regulators and he believes it could come as soon as the next two weeks. 

Trading Ideas For The Microsoft-Activision Deal: The Wedbush analyst recommends that traders sell at-the-money put options on Activision that expire in June or July and use the premiums that they collect to buy calls around the same price point.

"You can make a net neutral trade if you wish to. If you're wrong, then you own the stock at $65," Pachter said. 

If the stock does go down and you end up having to buy shares, Pachter said you will be in the name at a cheap price relative to his earnings expectations. 

"If you own it at $65, you're paying about 13 times this year's earnings and that's too cheap," he said. 

Related Link: 33% Upside For Activision Blizzard With Microsoft Deal, 26% Upside Without? 3 Analysts React To Q4 Earnings

Pachter's view is different from the majority view, but he doesn't see it as contrarian, he said: "I take a correct view. It's not my fault that there are so many people who are out to lunch and don't understand how the law works."

Check out the full interview with the Wedbush analyst below:

ATVI Price Action: Activision shares are up 2.65% at $74.82 at the time of writing Thursday, according to Benzinga Pro.

Photo courtesy of Microsoft. 

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