Since its founding in 1982, Electronic Arts (EA) has built itself up as one of the world’s largest gaming companies.

The company is largely known for being the creative force behind popular gaming franchises like Battlefield, the Sims, and sports titles like EA Sports FC and Madden NFL.

EA has generated revenues from its games through subscriptions and microtransactions, which provide recurring revenue streams. 

And even though these monetization strategies have enabled it to generate steady returns, it wasn’t spared from the gaming industry’s slowdown as the company’s shares slid nearly 17% after it cut its fiscal year forecasts due to a slowdown in its gaming franchises. 

EA made headlines earlier this week as it announced it was going private through a $55 billion deal with a group of investors composed of Saudi’s Public Investment Fund (PIF), private equity firm SIlver Lake, and investment firm Affinity Partners.

Coincidentally, this deal also marks the largest leveraged buyout in history, eclipsing the $45 billion spent on the privatization of TXU in 2007.

While there are concerns surrounding EA’s recent performance, the entities taking EA private see a stable cash flow generator that has the potential to unlock additional value once its operations are streamlined and optimized.

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Since its founding in 1982, Electronic Arts (EA) has built itself up as one of the world’s largest gaming companies.

The video game publisher is largely known for developing and publishing various gaming franchises like Battlefield, Need for Speed, The Sims, and sports titles EA Sports FC and Madden NFL.

In recent years, EA has generated revenues from its games through subscriptions and microtransactions, rather than from purely selling games, which has provided recurring revenue streams. During the pandemic-driven lockdowns, the firm’s ability to generate returns was turbocharged as gaming surged in popularity with people stuck at home.

However, this pandemic era surge has reversed course as lockdowns receded and gamers were faced with an oversupply of new releases and increasing costs. As a result, the gaming industry contracted, even as companies continue to flood the market with new and expensive titles.

Even though EA managed to generate steady returns, it wasn’t immune from the gaming industry’s slowdown. Earlier this year, the company’s shares slid nearly 17%—its biggest single day drop in nearly 17 years—after it cut its fiscal year forecasts due to a slowdown in its EA Sports FC and Dragon Age franchises. 

Since then, its shares have steadily rebounded due to the anticipation for the latest iteration of its Battlefield franchise. And earlier this week, EA made headlines as it announced it was going private through a $55 billion deal with a group of investors composed of Saudi’s Public Investment Fund (PIF), private equity firm SIlver Lake, and investment firm Affinity Partners.

Under this deal, the group of investors will acquire EA for $210 per share in cash, a 25% premium on the company’s current share price. This represents the second most valuable acquisition in gaming history, only behind Microsoft’s (MFST) $69 billion acquisition of Activision Blizzard in 2023.

The $55 billion dollar deal also marks the largest leveraged buyout in history (LBO), leapfrogging the $45 billion that was spent to acquire TXU (now known as Energy Future Holdings) in 2007.

An LBO is a form of financial transaction where a company is acquired through borrowed money. In these transactions, the acquired company’s assets are used as collateral to secure the funding necessary for the acquisition.

In EA’s case, the buyers will contribute around $36 billion in equity investment, with JPMorgan Chase providing $20 billion in debt financing. It’s expected that EA’s revenues will be used to help pay off the ensuing debt.

While there are concerns surrounding EA’s performance as of late and that the deal might negatively impact the company’s ability to make new games, it has shown that it has the ability to generate steady returns in prior years. 

Moreover, by going private, EA will no longer fall prey to quarterly cycles and investor pressure, giving it the space needed to take calculated risks on current and upcoming titles and change how it monetizes the games it develops and publishes.

This is why Silver Lake, Saudi’s PIF, and Affinity Partners took EA private. They see a company with stable cash flow generation and significant potential to unlock additional value once its operations are streamlined and optimized.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research