Tuesday 28 March 2023
The risk-reward potential owning Activision Blizzard shares at $85 per share, in anticipation of the closing of the Microsoft acquisition at $95, are no longer compelling.
The EU’s competition authorities and the UK’s Competition and Markets Authority are due to provide their decisions on the merger on the 25th and 26th April, respectively. While in the US, the FTC is scheduled to commence its hearing on 2nd August.
This means that the value for ATVI stock at the end of April will either be $70 (no approval from CMA or EU) or $90 (approval). And at the end of August at $65 or $95.
With the UK’s CMA still investigating the deal with concerns around the implications on the future cloud gaming outstanding (“Previously stated provisional view that deal raises concerns in cloud gaming unaffected” – CMA, 24 March ’23), it’s no sure thing that the UK’s administration will let it pass.
From the current $85 per share price, applying a 50:50 probability to approval by the UK and EU’s competition authorities, we get an expected value of $80 (50% x $70 + 50% x $90) – a negative expected return over the next month.
Post mortem
We invested 10% of our portfolio in ATVI shares at $77 on 31st Jan 2023. Having sold out at $85 on 28th March 2023, we have netted a 10% return in 2 months – equivalent to an 80% annualised rate of return. This is a great result.
But before we start pouring the champagne it’s worth going back to the original thesis, in which I also proposed initiating the trade through a call spread vs. put option structure, paying roughly $1 to initiate. Specifically:
Currently the ATVI June-2023 80-90 Call Spread can be bought while selling ATVI June-2023 65 Puts for around $1…If the merger completes at $95 we make a 10-1 return
Source: My original ATVI buy thesis
This same structure is now trading at around $6 – a 500% return in two months!
In terms of portfolio contribution, supposing the option structure was initiated investing 1% of portfolio capital (as opposed to 10% in shares), this would have yielded a 5% portfolio level return, as opposed to the 1% contribution from the shares we bought (10% portfolio size invested x 10% return).
Suddenly my 10% in 2 months doesn’t sound as good…
The Equity Analyst 