Expect bidding war for Housers in February - Pachter

When Sam and Dan Housers' current contracts come to an end in February, both are likely to be involved in a bidding war between publishers keen to sign the Grand Theft Auto golden boys.

And whether they stay with their current employers or take their skills elsewhere, the impact is likely to be negative for Take-Two, according to Wedbush Morgan analyst Michael Pachter.

"The brothers are the driving force behind the Grand Theft Auto series, and are intimately involved in game decisions. While neither writes game code, we believe that they are analogous to the director of a Hollywood film, instrumental in determining the final shape of the ultimate games released," stated Pachter in his latest note to investors.

"We expect a bidding war for the Housers' services in February 2009, and remain convinced that Take-Two faces two equally unpalatable options: either lose the Housers to another bidder, or pay more to retain them."

Sam and Dan Houser signed a three year contract with Take-Two in February 2006.

If the Rockstar bosses stay with the company, Take-Two will be forced to increase salaries and offer bigger incentives. But if they quit the publisher, the Grand Theft Auto series may not fair as well without the two brothers who could set up a rival franchise, argues Pachter.

"The outcome will be leveraging, and the impact is likely to be negative. Should the Housers depart to Activision, Ubisoft, or even to EA, we think that Take-Two will suffer lower future sales of its GTA games.

"We draw an analogy to EA’s Medal of Honor brand, which saw sales decline by over 40 per cent following the departure of key members of its development teams in 2003. Those teams produced Activision’s Call of Duty franchise, which has consistently outsold Medal of Honor since the departure," he wrote. "In our view, the loss of the Housers could trigger a similar result, with a competing brand threatening future GTA sales."

Take-Two may be forced to increase its royalty rates to key employees, knocking a substantial sum off the publisher's bottom line.

"On the other hand, should the Housers remain at Take-Two, the price of making future Grand Theft Auto games will go up; we estimate that the current 'internal royalty' paid on the game is approximately 15 per cent of sales, and expect negotiations for retention to commence at a 20 per cent royalty rate.

"That would impair the company's bottom line results in future years; for example, had the 'internal royalty' been 5 per cent higher in FY:08, operating profits would have been lower by $32 million (5 per cent times USD 640 million in revenue), or around USD 0.40/share," he detailed.

Although Take-Two has said that it continues to seek alternative partnerships following yesterday's decision by Electronic Arts to stop its acquisition plans for the company, Pachter added that until the employment status of the Housers is solidifed, other companies are unlikely to make a formal offer.