Who really bought EA and why this isn’t a typical PE deal

[Music] I think we're just edging the listeners now because everybody wants to hear about the the EA acquisition.
So, so let's just get into it. So, let me let me just kind of like drive us in there. So, gaming giant Electronic Arts was bought in an unprecedented $55 billion deal. It's understood to be the largest leverage buyout in history, $36 billion with the remaining amount being financed by law. That's $19 billion of debt in this deal. And for those who don't know what leverage buyout is, it means that the assets of the company are being acquired along with those of the acquiring entity are often used as collateral for the loans. The goal is to use the company's future cash flows to service an eventual repay of the debt. This is classic private equity deal making. This is the second most valuable gaming purchase in history following Microsoft's $69 billion deal to buy

Activision Blizzard, which went through after significant battles with global regulators, which in this case did not happen. Seems like this was bought through a text message. The consortium of buyers include Saudi Arabia's public investment fund PIF, Silver Lake, which is not to be confused with the hippie neighborhood in in LA, and of course, Affinity Partners. So, to go a little bit deeper, PIF is a sovereign wealth fund of Kingdom of Saudi Arabia. Silver Lake is a private equity firm that focuses on large-scale investments in technology. They have $110 billion in combined assets under management. And Affinity Partners, for those in unknown what this interesting little private equity firm is, is first of all funded by PIF and headed by Jared Kushner. You be like, who's that? Well, he's the son-in-law of the president of the United States, Donald Trump. So, no wonder this deal got real quickly

signed. Anyway, the purchase price puts a 25% premium to the market value of EA. And according to Deote, it's on average there's a 30% average premium across all deals. So this is not on the high end. It's kind of like on the low end of the premiums of the deal. So there's a bunch of questions for Mr. Eric Crest who's who's wearing in memory hoodie on this podcast. Uh and some of them include is is selling of EA surprise? Is selling of EA so quickly an anomaly? Is this a fair valuation? because again the uh the multiplier is 19.6 or 20 and the multiplier for Activision was 22 for Ebido. I'm interested to know is this good for EA? Is this good for EA employees? I've been getting some DMs. I told them like welcome to Scopely. I mean all of my friends are basically mobile.
Yeah, exactly. EA Mobile is like you're Scopely.
All right, so first off this one really

hits close to home, right? First of all, it's another publicly traded company that's off the table, which is not good for Mr. Crest, just to be clear. Two, if you didn't know, well, most people know, I I actually worked at EA for a long, long time, seven years of sick. But what you might not know is I actually lived in grew up in Saudi Arabia. I actually went back to Saudi Arabia in 200. My boss in Saudi Arabia was one of the guys that was held against his will at the Ritz for six months. So, in 2017, so and I still have some Saudi friends. So I am actually relatively familiar with the kingdom. So first off to be clear this is not good for the industry as a whole. Right? Full stop. Right? This is not good when big companies get taken off the table. Like it's just not good. Right? But it's not as bad as some of the people that are saying like everyone has an opinion on this. Like LinkedIn has been just littered with opinions on this deal. And I'm also a little bit uncomfortable as being one of the more positive people on this particular deal because everyone seems to be like doom

and gloom right now. And I'm actually not quite that doom and gloom as as many others. So I think the fundamental thing that I want everyone to get out of this is that this is not a PE deal, right? It may look like a PE deal. It may smell like a PE deal, but it's not a private equity deal. this is not really an LBO at all. Right? And without that fundamental understanding, you just basically go down the rabbit hole of wrong analysis on this thing. And I think Jason Shrier was guilty of this as well when he basically expected to have mass layoffs at EA is what the way he put it on LinkedIn, right? And I I think that's actually fundamentally wrong. Like I just don't think that this is actually the the LBO of old, right? This is not KKR, you know, like the barbarians at the gate, right? Just coming in and just annihilating the company. That's just not what what is happening, right? And I do appreciate the fact that Jason did reach out on

LinkedIn about this particular subject. I don't think I convinced him on this, but this is just my kind of take on this thing. So, so anyway, some people are saying there's like be 25% 30% layoffs in order to like service the debt. And I think Jason's in this category and that is typical for some a lot of PE transactions. But I just don't think that this is the case. First of all, as much as I criticize Andrew for his lack of vision, lack of strategy, mismanaging non-sports gaming, mobile, etc., etc., etc., his BMI, he's is fancy talk, all that other stuff. I don't think he would ever sign a deal in which it required him to lay off 25 to 30%. I don't think that's within him. Everyone I talk to says that that that is not who he is, right? So there's that thing, right? But the fundamental thing is that this deal is Saudi driven, right? Silverlake is just acting as a face of this transaction to make it easier for regulators to get behind, right? Affinity is dealing with the politics because Jared Kushner is like obviously

in with the Trump administration, right? And on their own, Silverlake would never buy a company like this. They wouldn't take this kind of risk. And I think Saudis would have a tough time doing this on their own as well, right? With the regulatory scrutiny around this. And again, as we know, this was a goal for the Saudis from the very get-go, right? They wanted to get this deal done. They wanted to have a big presence in gaming. They bought Scopi, but they also wanted to have AAA publishing on the console side. I think the one thing I did get wrong on my particular LinkedIn post was the premium, right? The post said that they should get 65 billion. In a typical PE transaction, they should get 65 billion, right? But this is not a PE transaction really. This is a coalition of the willing, right, of of the management that's willing and the buyers that are willing and the management team that is willing. And this is not hostile deal in any way at all. So the reason I think kind of this is bad is taking a publicly traded name off table is really bad, right? It's less transparency,

fewer public comps, and just weaker liquidity across the board. you know, when Activision was taken out, that removed the ability for them to do a lot of acquisitions, particularly, you know, EA's out now. Like, it's just not good for the industry as a whole. So, here's the good. I think, you know, it is a capital infusion in a way into the industry. The Saudis have been very active and aggressive and they likely will continue to be that way. So, that's actually good. Silverl actually could relist their equity stake in this business. We don't know what the Silverlake piece is, but nonetheless, they could actually go public 3 years from now and in theory and bring this thing out again is what the typical thing would be for a private equity firm, but they don't need to do that either, right? So anyway, job stability. I do think that there will be just job stability amongst the core assets of EA for the next three years, which is good. You know, they require that talent. And the one thing that people keep mentioning is that as a private company, they have much more freedom to do different strategies, right? So, cut the bureaucracy, streamline operations,

reinvents in long-term growth things initiatives. Now, I think this is kind of [ __ ] [ __ ] Honestly, I think it'll be I think it's hard for a company to pivot after doing this for so many years. But I think what people don't understand out there is that the restrictions you have of medium-term planning beyond two to three years in a publicly traded company where you have to deal with quarterly earnings every quarter, it is [ __ ] hard. it is really really hard to justify investments in in longer term thinking. So nonetheless this this could open them up the bad. So what's clear is that there will be cuts. Like I'm not suggesting there are not going to be layoffs. There are certainly going to be layoffs on this central functions that don't make sense. The underperforming studios like honestly if I was at boware I'd start getting your resume together. mobile roles like with Scopely even though Savvy owns Scopely and Piff owns EA and so they're anyway I would be worried a little bit on some of the mobile operations clearly there is some

cultural mismatches and what I meant by this that wasn't very clear in what I wrote is that I think there's just some people that don't want to work for a Saudi company right full stop right and that may be show some attrition at the top the other thing is that like there's no stockbased comp so you're going to basically have to reincentive all these people who have made a [ __ ] ton of money in theory on all the stock that they're selling. That may be actually really challenging to do and be competitive because there's not unlimited upside like there is with stock. And from an industry perspective, and this is more challenging to understand, is that this the privatization just means less transparency like reduced visibility of the gaming space as a whole, right? There's only one main left. There's only take two that's left on the market. Roblox doesn't count because it's a platform, right? And also fewer public exits make it uh limit like liquidity in generally for developers and investors. So I want to be clear on this. I do think this is a far better outcome than

like Microsoft's like slow motion train wreck with Activision, right? And the Nepacside at Ubisoft, right, which is an absolute disaster. And obviously Embracers like absolutely reckless acquisition spree and inevitable value destruction. Those three things are far worse than this deal. Like 100%. Like no doubt in my mind.
There's a voice on LinkedIn called Simon Pullman. He's an entertainment lawyer. So he had some interesting takes. I don't agree with most of them, but I'm going to let you disagree on these ones. So first of all, there's going to be layoffs. 25% of the workforce is getting laid off. You're saying [ __ ] This is not a typical PE acquisition. And we have Scopi as an example that grew after the acquisition. didn't get smaller, right?
That's not part of the plan. And I think Andrew will be there for at least three years. And I don't think he would allow that kind of uh frankly.
Uh the second point on his list was I'm not going to go through all of them, but just the most interesting ones, AI

stuff. So, Financial Times was saying that a lot of thinking here is that the purchases believe they can use AI to create efficiency.
No, no, no, no. Dude, that guy in Toronto, dude, he's going to be looking for a job, dude. Like, the AI is Yeah, he's going to be He's got to get his resume dusted off and go back to [ __ ] McKenzie, dude. Like, no way. No way, dude. No [ __ ] way, dude. AI.
Oh, you mean the the EA Mackenzie guy? Like the the strategy guy?
Who cares?
I mean, he's he's he's fine. He he got his stock.
He pontificated for like three years on [ __ ] Right now he's made his money. Now he can go like live his life up in Toronto. Yeah, he's going to get hired by Meta or Google or whatever, you know, trillion dollar company pushing AI.
Dude, I'm sure that guy is the nicest guy. I apologize for being a jerk. I just It's just so funny like these these type of roles in these companies just crack me up.
EFC goes free to play.
No, NO, DUDE. THAT is the stupidest take

I've heard. Like that. Why would you give that up? That's a billion dollars a year. That's crazy, right?
Predictable. You know what's really crazy though
is that the Saudis are [ __ ] in bed with FIFA, dude. FIFA is coming back, baby. FIFA is back next year for the [ __ ] World Cup. Is it next year for World Cup? Whatever the world, we'll get FIFA back, dude. Cuz like those guys are like totally tight, you know?
Yeah.
He I know the FIFA guy knows he made a [ __ ] mistake. Like it was so stupid what he did, but I think with that relationship, we're going to get FIFA back and we're going to pay nothing for it, right?
Yeah. Yeah.
Let the Saudis pay.
Yeah. No more EFC. Let's bring FIFA back. Like, let's bring the other guy.
Yeah. Yeah. FC is stupid. Let's bring FIFA back.
Hey, we all call it FIFA anyway, right?
Exactly. None of these Costco names for a game. Let's put in the premium back. So, then another part was there's going to be fewer franchises.
I mean, you're going to divest out of the things that don't make sense, right? Like again, Mass Effect, Boware, Dragon Age, like all that stuff.

Dragon Age. Uh EA will be divided into EA Sports and the other shenanigans.
Okay. Yeah. I mean that's the way it is now. So I don't know why that that's not a big big
and it kind of makes sense for a PA perspective. If you want to sell this company after three or something years then it makes sense to
again that is not the goal. That's the whole pro part. Like the minute you start thinking in those terms you're going down the wrong road right that they want to build. They don't want to sell.
Saudi doesn't want to sell this thing. They want to own it and they want to build it. Period. Like that's their goal. They've said that. Like it's not like I'm making this [ __ ] up, you know?
They're going to have studios in in in Riad and Jedha and so forth. Okay. Mobile will be a bigger focus after this acquisition for EA.
That's a stupid That is the stupidest take ever.
Okay. Okay. mobile will be a focus for the PIFF or the Saudis and the Savvy, but I don't know if it's a they may move

it all over to Scopely, right? That would be the make most sense, right? Like none of it belongs within EA, right?
Yeah, that would make all the sense. EA like EA shouldn't be doing mobile.
Scop is at such scale now that everything that EA does is vice nuts for them.
Oh, except for FIFA, sorry. Yeah, yeah, right. You're right. FIFA mobile is amazing. Like, they're doing really well, but everything else is completely a rounding error, right? So, that's a tough one. I think that's going to be the hardest decisions that they have to make is is to figure out how how to do that, right?
We should have EA's head of mobile on the podcast. He's ex Scopely.
Oh, yeah. Right. Like he would ever come on this podcast. Give me a
He would like to He would like to. The question is EA allows him. Um, IP sales at a bargain after this acquisition. So, basically EA will be unloading, like you said, second tier IPS. No, that's what he said.
Yeah,
that they would sell IPs, dude. They haven't sold an IP in their entire like history.
I know.

That's a stupid take. That's a sub. That's someone that doesn't know anything about gaming.
It's coming from a perspective of this is how PAs operate and so this is how it will be done.
This is the problem.
This is the problem.
You're going to love the last one. Ideology imposed on EA creatives.
No way he said that. Oh my god. I got to read this thing. This guy's an idiot. This guy's doesn't understand at all. He certainly doesn't understand the Saudis.
Yeah. Like like Scoply Games are now fully idealized and and Nintendo, by the way, with their Anyways, I'll give my quick take. I think there's two main drivers for this acquisition. Number one is economic diversification where the country is hedging against oil dependency. This is what Saudi Arabia has publicly informed as their strategy. It reads clearly and they see entertainment and gaming as an important way to diversify. The number two is actually they earmarked 38 billion to

make Riad a gaming hub. 38 billion. So they already have the East Worlds World Cup, Scoply, Niantic, Nintendo, Take Two investments, EA. They interestingly sold some of the stakes in Asian gaming giants like like NCOF and Nexon, but that's a different story. Anyway, that's part of it. So, that's their strategic goal. They want to diversify and they've earmarked 38 billions to do it. And then the second thing is the powers that be, the rulers have genuine interest towards gaming. I've heard stories from very credible sources, big-time investors who are in Riad meeting with, you know, the powers at B having the dinners and so forth. And when the dinner is over, they told this person, "All right, now we go and play." They went back to the palace and there was a gaming hub with esports like trainers and everybody put their hoodie on and played till 2 a.m. League of Legends on the game. Like this is the people who make the decisions, they

actually love games. That's why they say, "You know what? Put in 38 billion. We want to have games here."
Exactly. That that's actually what I tried to explain to uh Jason as well is like yeah
they're in it to win it. They
just like it. They just like it.
They just they just love this business. They love this this industry. They want to build. They don't want to destroy, you know. So
they have gaming chairs and hoodies and coaches like
coaches
bu coaches. There was a professional coach when he went in. There was a League of Legends coach waiting for them in the gaming house and everybody put their hoodies on and sat on the gaming chairs and started playing League of Legends. This is a true [ __ ] story. I'm not going to name who, but
yeah, I I truly believe that there will be studios opening in key Saudi Arabian cities after the second.
Well, that's the other thing. It's like you're not you're not going to build an EA Sports hub in [ __ ] Riad for Christ's sakes. And now I'm getting doing
it's going to be like they're going to start somewhere. They already opened up a Scopely studio.

Let's move on.
It's part of the strategy. It's part of the strategy. Anyways,
all right.
Josh, Shanley, give us your UK take.
My UK take I have I have I have no sake. I got questions. I got questions for especially for Eric.
19 billion in debt on a on an EBIT a tenth of that. I just want to understand I mean like interest isn't free. How crippling is this debt burden? you know, how much cash flow is actually like left for reinvestment. How important are these cuts? And then I just want to learn, you said running out of comps is a negative. What does it do? Because my first thought was, well, couldn't it actually raise multiples for the industry if you're running out of public comps?
Yeah. So, this is the big thing about like having $19 billion in debt. Like, how are you going to service that debt? But I think what people don't understand is that EA makes like $2.5 to3 billion a year in free cash flow, right? They they are very profitable business generally speaking. That is enough in essence to service the debt. And if they remove

like 300 to $500 million in spend potentially like that even adds more to that as well. And so that should be plenty, right? And they also have all the rest of the companies within their ecosystem, Scoply and Nchech, etc. that could help service this debt as well. But I actually would make the argument that it doesn't really [ __ ] matter, dude. This is Saudi Arabia, dude. They got a billion dollars under the couch, dude. Like, if if they if they want to help them out, if they run into any type of cash flow problems, they'll just pay it off, dude. They don't give a [ __ ] right? They got money coming out of their ears over there. You know, this is more speculative in my part. Like, I think the 35 million was like set by the prince or someone then basically say, "Hey, this is what we got we have for you to spend." and then make up the rest of it other ways. But that doesn't mean going forward they won't pay it down themselves, right? Like this is Saudi Arabia, dude. JP Morgan like just wants Saudi's business, you know? Eric Kushner's two billion 50 60% of their

business was being funded by the PIFF, right? I don't know what Silverlakes's involvement is or if Saudi is an LP in Silverlake. Maybe. Who knows? We don't know
if Saudis are LP in Silver Lake.
We don't know. I don't know for sure. But I No. No. We don't we don't know for sure, BUT I'M PRETTY [ __ ] sure that they are, right? So, like this is all like a circle jerk between these like big FINANCE YEARS. GOLDMAN SACHS, DUDE. THAT [ __ ] has made more money on this industry at Goldman Sachs than anybody, dude. He
shout out to him. Shout out to him, by the way.
That guy is a bad ass, dude. That guy is a bad ass [ __ ] dude. He should [ __ ] retire, dude. He has made so much money in this space. He needs to sell take two and then he's cleaned the house. Once he sells take two, he's cleaned the house.
Drop the mic and move the [ __ ] on, dude. What are you doing? Like, oh, it's killing me, this guy. I met him. Oh, anyway. All right, moving on. Okay, now I'm going to come bring it down a little bit.

Actually, let's just leave it at that. Look, at the end of the day, it's very esoteric how to describe why not having publicly traded names is bad for the industry, but it's less v visibility, less value benchmarking. The retail and public equity space is huge. Trillions of dollars of investment, right? And if you don't have access to these names or publicly traded names that you can see what's happening on a quarterly basis, you lose visibility into the industry as a whole, right? So, it's just not good for other companies going forward to go public for instance, right? It also creates less liquidity, right? Less IPO tracks, less acquisition currency, etc., etc., etc. So, it's just not good for the space to have these companies taken off the up off the board.
Chris, what would have happened if Disney would have acquired EA? Cuz that could have been the case as well, right?
I think that would have been far more value destructive. I would have been far far more negative on Disney acquiring EA than the Saudis because I think Disney know doesn't know [ __ ] all about video games and they they would have [ __ ] it

all up, right? Easily. Yeah. Right.
But the one question that no one was really seem to be asking is why is EA sell? Because it seems like they have like a good pipeline. Battlefield looks strong. Beef is going to be really good this year. Sports football is good. So, it looks like they have some runway and they were at an all-time high and so they got a premium on the all-time high. So, that's actually pretty good. I think one of the things you have to appreciate about EA is that the majority of the board has been in there more than 10 years. Dude, Andrew has been CEO for 12, right? That's a long [ __ ] time to be a CEO and dealing with this [ __ ] right? Dealing with people like me talking trash about Andrew. Like I could even I I could even perform at that level, right? Like anyway, but but the point is is like what they want is their legacy to mean something and that and having a graceful exit is great rather than leaving in some kind of like you know sham or something like that getting acquired and getting destroyed or getting pushed out or whatever. So this gives them ability to actually get out in a meaningful way, stay somewhere for

three years and then go on to be like a private equity guy at some sports firm or something like that like is probably what Andrew will end up doing. They've been trying to sell, you know, according to Vape Vine to like big tech like Microsoft and Disney and and Amazon even. It didn't work out for a variety of reasons. But I think this gives them the board a way out and to leave as heroes, right? And
again, that's the other reason I don't think there's going to be mass layoffs after these transaction because that would not be a good way of going out, right? After 12 years of being at the helm, you know,
this is not as negative for the industry. This is still negative for the industry, but not as negative compared to like Activision, Ubisoft, and Embrace, right? Which were just complete absolute train wrecks for this industry.
Yeah. Who do you think Piff acquires next?
I think they got to digest this [ __ ] for a while, dude.
I think they're off to acquisition for a while. I think they've gotten all the pieces that they need in order to grow,
own a huge share of this industry. [ __ ]

maybe they should acquire Microsoft, Xbox, DUDE. THAT would be when when goes to sale. Yeah, that's true. Because now the private equity could actually chop it up and take that. Do you think EA will be acquiring anything after this? Like cuz Scopley's M&A team is hunting still. They're as aggressive as ever. They acquired Niantic.
So EA Corpdev can just go and take a break.
No, Corpdev is going to be Yeah, they're out to lunch, dude. They probably will help with integration and help with the strategy. They'll help the guy in Toronto, whatever. But they're not doing any acquisitions anymore.
Partnerships have good actually someone that knows something about video games, they'll go up there and start helping the guy in Toronto.
Okay. Okay. Corpdev takes a break. [Music]