Electronic Arts Buyers Might Be Paying Too Much for EA Stock

Visitors play EA Sports FC25 at the Gamescom computer gaming fair on the opening day in Cologne, Germany, on Wednesday, Aug. 21, 2024. (Alex Kraus/Bloomberg)

The $55 billion Electronic Arts leveraged buyout unveiled Monday could prove a difficult deal for Silver Lake and other buyers to earn a high return on their investment.

The buyers are paying a lofty price and putting up a substantial amount of equity, which both work against generating an ample return, assuming the deal gains shareholder approval.

Electronic Arts, the big producer of videogames, agreed Monday to a $55 billion deal, including debt, with Silver Lake, a leading technology investment firm; PIF, the Saudi Arabian sovereign-wealth fund; and Affinity Partners, headed by Jared Kushner. The deal is the largest LBO ever.

The buyers will pay $210 a share in cash, a 25% premium to the unaffected closing share price of $168.32 on Thursday, a day before The Wall Street Journal reported that Electronic Arts was engaged in talks with the Silver Lake group on a deal.

Electronic Arts shares are up 5% to $203.14 in early trading Monday. The stock trades about 3.5% below the deal price because investors will have to wait until the expected closing date in the second quarter of 2026—first quarter of the company’s fiscal year—get paid. Given the size of the deal and the board’s blessing of the transaction, it seems unlikely that there will be a topping bid. With another bid unlikely, the arbitrage spread looks tight.

Until a rally this year, Electronic Arts stock had not been a strong performer, trading in a range of $125 to $150 for most of the past five years.

Citi analyst Jason Bazinet wrote late Friday in a client note that a potential LBO “suggests a relatively muted IRR (internal rate of return) for the buyer.” His calculations—which were based on somewhat different terms than those on the actual deal—showed an IRR of just 3%, assuming an exit multiple of 15 times Ebitda—short for earnings before interest, taxes, depreciation, and amortization—after five years.

That would be a low IRR, since LBO buyers generally aim to generate at least a midteens return. An IRR is a standard measure of LBO performance.

Among the factors that could hold down returns are the big equity check that the buyers will pay. The Silver Lake group plans to contribute $36 billion of equity, including an existing 10% equity stake now held by PIF, and borrow $20 billion through JPMorgan Chase. It’s notable that JPMorgan is handling the financing itself. This shows that despite the growth in nonbank private credit lenders, banks can flex their financing muscles on a large transaction and JP Morgan is the banking industry leader.

The higher the equity contribution, the lower the potential IRR because the buyers don’t benefit as much from leverage. It’s the same concept when buying a home. If you make a 20% down payment, your potential profits are higher than if you put up a 50% or 65% down payment.

Even with the high equity contribution, the new Electronic Arts will carry sizable leverage of more than $20 billion, including assumed debt, or about seven times projected Ebitda, in the company’s fiscal year ending in March, Barron’s estimates.

Assume a 7% rate on the new debt and the company could be paying $1.4 billion in annual interest costs, a sizable chunk of trailing free cash flow of $1.8 billion.

The buyers clearly are bullish on Electronic Arts’ stable of games, including Battlefield 6, which is due to launch in October.

Here are some of the financial numbers:

The buyers are paying about 20 times estimated Ebitda of about $2.7 billion in the current fiscal year ending in March 2026, and closer to 27 times including stock-based compensation.

The price also works out to about 26 times projected earnings per share based on non-generally accepted accounting principles, or GAAP, of more than $8 in the March 2026 fiscal year and closer to 60 times estimated GAAP earnings per share, which reflects stock compensation estimated at around $600 million.

The better financial measures are the GAAP figures since stock compensation is a real expense although Electronic Arts and many technology companies offer an alternative non-GAAP measure that excludes it. Warren Buffett and others have long argued that stock comp is a true expense.

Benchmark analyst Mike Hickey takes a differing view on the deal. In a note Monday, he wrote that the deal “undervalues EA’s long-term earnings power.

“On a normalized FY27—FY28 earnings framework, applying a 25x multiple in line with Take-Two, we value EA at $250 per share, with a best-case path to $300 if Battlefield evolves into the market share leader,” he wrote.

The buyers likely share Hickey’s optimism. And Silver Lake has a strong reputation in the tech world.

But given the high price of the deal, it could be tough for the buyers to generate outsize profits on this deal.

Corrections & Amplifications: The deal to take EA private is set to close during the second quarter of calendar 2026. An earlier version of this article incorrectly said it was the first quarter of 2027.

Write to Andrew Bary at andrew.bary@barrons.com