Brains! Why EA May Spend $1.3 Billion on PopCap
After weeks of speculation, Electronic Arts has confirmed that it has agreed to acquire PopCap Games for $750 million in cash and stock.
TechCrunch had originally reported that the two companies were in talks, but the acquisition seemed unlikely given that Electronic Arts had told the public markets that it was through making big acquisitions, especially after buying Playfish.
EA will purchase PopCap, which is known for such casual games as Bejeweled and Plants vs. Zombies, for $650 million plus $100 million in stock and a multi-year earn-out.
PopCap had previously said it was eyeing an IPO in the October timeframe.
In a release, EA’s CEO John Riccitiello said, “EA and PopCap are a compelling combination. PopCap’s great studio talent and powerful IP add to EA’s momentum and accelerate our drive towards a $1 billion digital business. EA’s global studio and publishing network will help PopCap rapidly expand their business to more digital devices, more countries, and more channels.”
In addition to the cash and stock payments, PopCap will have the chance to earn up to $550 million in additional cash if it hits the high end of its financial expectations, bringing the total transaction to $1.3 billion. Separately, EA will also provide up to $50 million in retention awards to PopCap employees to be granted over the next four years.
[Update: Read more about why Zynga’s $1 billion cash offer wasn’t enough to win the deal.]
Here’s the full release:
REDWOOD CITY, Calif., Jul 12, 2011 (BUSINESS WIRE) — Acquisition Price of $650 Million Plus $100 Million Stock & Multi-year Earn-Out
–Plants vs. Zombies, Bejeweled and Zuma Headed to New Platforms and Markets
–EA Reaffirms Non-GAAP Q1 FY12 and Full Year FY12 Financial Guidance
Electronic Arts Inc. ERTS -2.77% today announced an agreement to acquire PopCap Games, a leading provider of games for mobile phones, tablets, PCs and social network sites. With blockbuster titles like Plants vs. Zombies, Bejeweled, and Zuma, and a proven ability to create new hits, PopCap is a leader in the fast growing market for casual digital games.
“EA and PopCap are a compelling combination,” said EA CEO John Riccitiello. “PopCap’s great studio talent and powerful IP add to EA’s momentum and accelerate our drive towards a $1 billion digital business. EA’s global studio and publishing network will help PopCap rapidly expand their business to more digital devices, more countries, and more channels.”
“We picked EA because they have recast their culture around making great digital games,” said David Roberts, CEO of PopCap. “By working with EA, we’ll scale our games and services to deliver more social, mobile, casual fun to an even bigger, global audience.”
“PopCap has a proven financial trajectory with sustained revenue growth and double-digit operating margins,” said EA CFO Eric Brown. “On a non-GAAP basis, this deal is expected to be at least ten-cents accretive in fiscal year 2013.”
PopCap is one of the largest and most respected digital and social gaming companies with more than 150 million games installed and played worldwide on platforms such as Facebook(R), RenRen, Google(TM), iPhone(TM), iPad(TM) and Android. In calendar year 2010, approximately 80% of PopCap’s revenue was on high growth digital platforms.
EA will pay approximately $650 million in cash and $100 million in shares of EA common stock to be issued to certain stockholders of PopCap. In addition, the PopCap sellers are entitled to additional variable cash consideration, contingent upon the achievement of certain non-GAAP earnings before interest and tax (“EBIT”) performance milestones through December 2013, EA’s third fiscal quarter end.
At the upper end of the earn-out, the performance targets for EBIT are approximately $343 million in total PopCap standalone EBIT generated over the two-year period through December 2013. The exact earn-out calculation is subject to adjustments. EA will also provide up to $50 million in long-term equity retention awards to PopCap employees to be granted over the next four years.
Transaction and Financial Highlights
— The transaction is expected to close in August 2011, subject to customary closing conditions, including regulatory approvals.
— On a non-GAAP basis, the acquisition is expected to be EPS neutral to EA’s fiscal year 2012 results, as a result of one-time transaction costs, and at least $0.10 accretive to EA’s FY 2013 non-GAAP EPS.
— For the first quarter of fiscal year 2012, EA is announcing preliminary results of approximately: — $500 million to $525 million in non-GAAP revenue versus guidance of $460 million to $500 million of non-GAAP revenue.
— ($0.40) to ($0.37) in non-GAAP diluted loss per share versus guidance of ($0.49) to ($0.44) in non-GAAP diluted loss per share.
— EA is reaffirming its full year fiscal year 2012 non-GAAP guidance of $0.70 to $0.90 diluted earnings per share. EA is also increasing its full year non-GAAP revenue guidance to a range of $3,800 million to $4,025 million to account for the inclusion of PopCap for a portion of FY12.
— EA is announcing preliminary guidance for the second quarter of fiscal year 2012 of non-GAAP diluted loss per share ranging from ($0.15) to ($0.05).
— EA has executed a commitment letter for a $550 million senior unsecured bridge facility with Morgan Stanley Senior Funding, Inc., J.P. Morgan Securities LLC, J.P. Morgan Chase Bank, N.A., UBS Securities LLC, and UBS Loan Finance LLC, that EA may choose to draw upon prior to closing the acquisition. EA expects to explore permanent financing options in connection with the funding of this acquisition. Morgan Stanley & Co. LLC provided EA’s board of directors valuation advice in connection with the transaction. EA was also assisted by UBS Investment Bank.
In addition, the $600 million share repurchase program that EA announced in February, 2011 remains in effect. As of July 1, 2011, EA has repurchased 7.1 million shares for a total of $149 million under this program. EA is not obligated to repurchase any specific number of shares under the program and the repurchase program may be modified, suspended or discontinued at any time.
Business Outlook as of July 12, 2011
The following forward-looking statements, as well as those made above, reflect expectations as of July 12, 2011. Electronic Arts assumes no obligation to update these statements. Results may be materially different and are affected by many factors, including: product development delays; competition in the industry; the health of the economy in the U.S. and abroad and the related impact on discretionary consumer spending; changes in anticipated costs; the financial impact of acquisitions by EA, including the PopCap acquisition; the popular appeal of EA’s products; EA’s effective tax rate; and other factors detailed in this release and in EA’s annual and quarterly SEC filings.