What might a $55bn EA buyout mean?

• Analyst Nicholas Lovell says deal is a bet that the games industry is mature and predictable.
• Gossamer Consulting Group principal Eric Kress believes the buyout is Saudi-driven, with Silver Lake "acting as the face".
• Aldora CEO Joost van Dreunen says competing at the top level of a Monopoly Go requires "sovereign-scale financing".

Update: It's official, EA will be acquired in a $55 billion deal.

Original story: Last week media outlets including Reuters ran the surprise news that publishing giant EA is in advanced talks to go private at a $50 billion valuation.

Sources familiar with the matter claimed that a deal could be announced this week. Firms participating in the buyout are said to include private equity firm Silver Lake, Saudi Arabia’s Public Investment Fund and Jared Kushner's Affinity Partners.

The deal would mark one of the largest leveraged buyouts in history. Following the news, EA shares rose as high as 13.5%.

Spilt Milk studios co-owner and industry analyst Nicholas Lovell said the deal, reportedly worth around $50bn and including $20bn of debt, will take cash flows from big, predictable games and use it to service that debt - not invest in future games.

“So it is basically a bet that the games industry is mature and predictable, that EA has found stable cash flows for the next decade without reinvestment and that no one else emerges to eat EA's lunch,” Lovell wrote on LinkedIn.

“There are two ways this plays out. If that is true, the majority of the money goes to service debt and pay dividends to the equity holders. EA is no longer a driver of innovation, or even really new games. It's all about squeezing existing franchises.

“If this bet goes south, EA struggles to pay its debts. There are lower dividends to the equity holders. EA is no longer a driver of innovation, or even new games. It's all about squeezing existing franchises.

“Either way, there will be a lot of job losses. A lot of ‘right-sizing’. Margins will be squeezed. And I suspect speculative investment in new ideas will be limited.”

Saudi-driven deal?

Gossamer Consulting Group principal Eric Kress said taking a public company off the board is “generally bad for the industry”, with less transparency, fewer public comps, and weaker liquidity.

He speculated, based on the reports, that the deal seems Saudi-driven, with Silver Lake “acting as the face”.

“On their own, Silver Lake wouldn’t take on this kind of risk and the Saudis would have a tough time with regulatory scrutiny without a partner,” he wrote.

Kress noted a deal could free EA from quarterly earnings pressure, allowing it to potentially “cut bureaucracy, streamline operations, and reinvest in long-term growth initiatives and make new games”.

He also suggested a deal could provide job stability in the near-term, with ongoing live service games, sports franchises, and development pipelines all requiring talent, making wholesale cuts unlikely from the outset.

However, Kress said there could also be potential bad outcomes.

"Cuts in underperforming studios and central functions are still likely including redundancies in mobile,” he said

“Cultural mismatches could trigger senior/creative talent attrition. Privatisation means less transparency, reduced industry visibility, and fewer public comps.”

He added: “The major assumption is that Saudis are driving this deal and that typical private-equity discipline likely won't apply. This is fundamentally a Saudi strategic acquisition. Once the final structure is disclosed, that dynamic will become more or less obvious.”

Sovereign-scale financing

Aldora CEO Joost van Dreunen said an EA buyout would mark the second-largest gaming deal ever behind Microsoft’s $69bn acquisition of Activision Blizzard.

“PIF’s $5bn Scopely deal was initially seen as overpaying, until Monopoly Go! generated around $5bn in revenue and proved it a bargain,” he wrote.

“EA would be the crown jewel, but the timing is tricky. Battlefield 6 appears solid, but it will soon face competition for attention from GTA 6. Meanwhile, EA Sports FC has not entirely replaced FIFA’s momentum.

“The bigger story is capital. GTA V was launched in 2013 with a total budget of $260 million. By contrast, Scopely has reportedly spent $1bn on marketing alone for Monopoly Go. Competing at that level requires sovereign-scale financing, something only players like PIF can provide.”