Electronic Arts Inc.(ERTS), popularly known as EA, has agreed to buy PopCap Games for an estimated $1.3 billion. With this acquisition, EA’s plans of entering the rapidly growing games market on cell phones and social networks will gather the necessary momentum. The deal is set to close on August 2011, subject to customary closing conditions, including regulatory approvals.
PopCap Games, a Seattle-based game developing company, is one of the largest social gaming companies accredited with over 150 million games that are played on various platforms such as Facebook, RenRen, Google Inc. (GOOG), Apple Inc.’s (AAPL) iPhone, iPad and Android. PopCap Games had earned more than $100 million in revenues last year and has a possible growth rate of nearly 40% on a yearly basis. The company had earned approximately 80% of its revenues from high-growth digital platforms.
The most successful titles from PopCap’s stable include Plants vs. Zombies, Bejeweled, and Zuma. PopCap also boasts a track record of developing new and innovative games that become an instant hit in the fast growing market for casual digital games.
Of the estimated $1.3 billion consideration, Electronic Arts will pay $650 million 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 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, PopCap Games, in association with EA and its world class studios and infrastructure, would rapidly expand their business to more digital devices, newer countries and more channels.
EA has significant exposure in the social gaming market and has been trying to expand in the segment. With this acquisition, it can now provide healthy competition to Zynga, the company that dominates in the social and casual gaming market.
EA’s Financial Highlights
Based on this opportunity, the gaming giant also announced its preliminary fiscal 2012 results. EA confirmed that the acquisition will have a neutral effect on its fiscal 2012 earnings per share (EPS) as a result of one-time transaction costs. However, the company mentioned that the deal is expected to increase its EPS by at least 10 cents in fiscal year 2013, on a non-GAAP basis.
For the first quarter of 2012, Electronic Arts reaffirmed its revenue expectation on a non-GAAP basis to range between $460.0 million and $500.0 million. Loss per share on a non-GAAP basis is expected to be in the range of 49 cents to 44 cents.
For fiscal 2012, EA reaffirmed earnings on a non-GAAP basis that is expected to be in the range of 70 cents to 90 cents per share. Nonetheless, with the inclusion of PopCap Game’s revenue, EA increased the revenue guidance from a range of $3.75 billion – $3.95 billion to $3.80 billion – $4.02 billion.
Recommendation
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 guarantees market share gains over the long term.
With the advent of the gaming titles getting a digitized avatar, EA has launched Origin, its first online service through which the company plans to sell its downloadable titles directly to customers. We think that EA is better equipped than many new players to gain traction in the digital format with its variety of titles and massive fan following.
Additionally, the strategic acquisitions made by the company in the field of social and casual gaming platforms will reap benefits in the long run.
However, cut throat competition from Activision Blizzard Inc. (ATVI), Take-Two Interactive Software Inc. (TTWO) may act as 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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