Microsoft-Activision Spread Hits Lowest Since Merger Announced

(Bloomberg) — The gap between Activision Blizzard’s stock price and Microsoft Corp.’s takeover offer is at its narrowest level since the $69 billion merger was announced in January 2022, as an update from UK regulators lifts expectations that the deal could go through.

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Activision rallied 5.9% on Friday to $84.39, the highest since August 12, 2021. The surge came after the UK Competition and Markets Authority narrowed the scope of their merger probe, putting the stock around 11% below Microsoft’s $95-per-share offer. The gap was 23% when British regulators voiced opposition to the tie up back in February.

The market is currently pricing in roughly 50% odds of the deal being completed, assuming a $75 standalone value in Activision if the deal does not go through, according to Cowen’s Aaron Glick. This compares to about 30% odds a month ago, but at the time, market was pricing a $65 standalone value, he said.

“This seems to be a major pivot” from the UK’s CMA, which is now saying Microsoft has no incentive to withhold Call of Duty from competitors, said Frederic Boucher, a risk arbitrage analyst at Susquehanna International Group.

This approval is the main regulatory roadblock, he added. However, the pivot “does not mean that the approval is a done deal,” Boucher noted, since it still has an issue related to cloud gaming.

Meanwhile, puts expiring in January led Activision’s options trading on Friday, a sign that traders may be rolling up hedges to a higher level to protect against a drop in shares.

–With assistance from David Marino.

(Updates shares, adds options in final paragraph)