Electronic Arts Stock Offers Nearly 4% Return Until Closing Date of Leveraged Buyout

Attendees play the Battlefield V videogame during an Electronic Arts event. (Patrick T. Fallon/Bloomberg)

Key Points

• Electronic Arts is being acquired in a $55 billion leveraged buyout, the largest ever, by a group including Silver Lake Partners.
• The deal offers investors a nearly 4% return, with an annualized return exceeding 7% if the deal closes by April 2026.
• A topping bid is unlikely due to the deal’s size, board approval, and PIF’s existing 10% stake in Electronic Arts.

Electronic Arts stock is offering a modest return of close to 4% to investors following the news Monday of the $55 billion leveraged buyout of the videogame maker.

Electronic Arts stock gained 4.5% Monday to $202.05, trading nearly 4% below the deal price of $210 a share in cash.

A group including Silver Lake Partners agreed to buy the videogame company for $55 billion including assumed debt in the largest leveraged buyout ever.

The deal spread of almost 4% works out to an annualized return of more than 7%, assuming a closing date in April 2026. Electronic Arts said it’s targeting a closing of the deal in the second calendar quarter of next year (the first fiscal quarter of Electronic Arts’s fiscal year).

The annualized spread offers a modestly higher return than the roughly 4% return on U.S. Treasury bills maturing next April. Investors who buy Electronic Arts stock will also earn a dividend, but the dividend is low at under 0.5%.

Takeover arbitragers usually aim to earn at least two to three percentage points above the risk-free rate to account for the danger that a deal may collapse, resulting in a drop in the stock price. The current spread is in line with that premium.

Electronic Arts investors now face a choice of selling now and reinvesting the money or waiting until the deal closes and earning almost 4%. There seems to be little risk that the deal will collapse given the big equity check of $36 billion that that buyers will write plus committed financing of some $20 billion from JPMorgan Chase. Regulatory matters don’t appear to be an issue.

One bonus for Electronic Arts investors and any takeover arbitragers would be a topping bid for the company, but that prospect seems like a long shot.

Electronic Arts, however, hasn’t actively discouraged such an offer. One arbitrager points to a relatively small breakup fee if Electronic Arts agrees to a superior offer. That fee is $1 billion, or just $540 million, or 1% of the deal value, if a superior offer occurs within 45 days and the deal is terminated within 75 days, according to a company filing Monday.

A topping bid seems unlikely given the large size of the deal, board approval and the fact that one of the buyers, PIF (the Saudi Arabian sovereign wealth fund) already owns 10% of Electronic Arts stock. It also seems unlikely that Electronic Arts holders will reject the deal as inadequate.

Benchmark analyst Mike Hickey wrote Monday that “once a board approves a deal, shareholder votes are typically difficult to oppose, particularly with PIF already holding about 10% of EA and arbitrage investors often supporting board-backed transactions.”

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