Electronic Arts Inc. (ERTS), popularly known as EA, announced that it is issuing Convertible Senior Notes worth $550 million in a private placement with a semi-annual rate of interest of 0.75% per year. The Senior Notes, expected to mature in 2016, will be available to qualified institutional investors in accordance with Rule 144A under the securities act of 1933.
For its initial buyers, EA has approved a purchase of up to an additional $82.5 million of aggregate principal amount of notes to cover over allotment. The offering is scheduled to close on July 20, 2011.
The issued notes will be convertible into cash and the company’s common stock at the option of the buyers at an initial conversion rate of 31.5075 shares per $1,000 principal amount of notes. As per the initial conversion rate, the conversion price comes to $31.74.
EA intends to use a portion of the net proceeds of the offering to pay a portion of the cash consideration for its acquisition of PopCap Games, Inc.
Recently, EA had agreed to buy PopCap Games for an estimated $1.3 billion, of which $650 million will be paid in cash and $100 million in new shares. The rest of the $550 million payment is subject to PopCap’s performance in delivering $343 million or more in EBIT over the two-year period through December 2013. The exact amount is subject to adjustments. Additionally, EA will shell out $50 million in long-term equity retention awards to PopCap employees over the next four years.
We expect the acquisition to open up new opportunities for EA. The company projected $1.0 billion in revenue from the digitized version of the games, which will likely get a boost from PopCap Games as it primarily operates in the digital segment. Additionally, the acquisition of PopCap Games will be incrementally beneficial to EA in generating revenues through the high-margin digital segment in the long run.
We believe Electronic Arts has a strong product pipeline for fiscal 2012 and beyond, which will drive its top-line growth going forward. We believe that the high quality titles, impressive product line, increasing online exposure, social games and portfolio diversification point to market share gains over the long term.
However, interest expense will weigh on the company due to the issuance of the debt, which along with competition from Activision Blizzard Inc. (ATVI) and Take-Two Interactive Software Inc. (TTWO) will be headwinds going forward.
We have a Neutral recommendation on Electronic Arts over the long term (for the next 6 to 12 months). Currently, Electronic Arts has a Zacks #3 Rank, which implies a Hold rating in the short term.
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