How Will PopCap Help Electronic Arts Regain Financial Glory?
After market close Tuesday, Electronic Arts (NASDAQ:ERTS) announced an agreement to acquire PopCap Games for $750 million (plus an earn-out of up to $550 million). PopCap is a leading casual game company with 475 employees, with such games as Bejeweled, Peggle, and Plants vs. Zombies.
EA (NASDAQ:ERTS) expects this acquisition to be neutral to EPS in FY:12, but accretive to EPS by $0.10 in FY:13. PopCap had 2010 revenue of $100 million (EBIT margin of 16%), with projected 2011 revenue of $130 million. EA stated that the CY12 EBIT multiple range for the acquisition is 10 – 20x, implying EBIT of between $40 million and $130 million, or around $0.08 – 0.30/share contribution in FY:13.
EA also announced preliminary Q1 FY:12 (ending June) EPS upside, but did not raise full year EPS guidance. The company expects Q1 pro forma revenue of $500 – 525 million and EPS of $(0.37) – (0.40), which compares with guidance for revenue of $460 – 500 million and EPS of $(0.44) – (0.49).
Management raised FY:12 pro forma guidance for revenue to $3.80 – 4.025 billion from $3.75 – 3.95 billion, but is maintaining EPS guidance of $0.70 –0.90 to account for the acquisition. EA provided initial Q2 pro forma EPS guidance of $(0.05) – (0.15), well below our and consensus estimates.
We are raising our FY:12 pro forma estimates for revenue to $4.05 billion from $4.00 billion, and for EPS to $0.94 from $0.92. We are maintaining our FY:13 pro forma estimates for revenue of $4.20 billion, and EPS of $1.15, and will adjust our estimates to account for the acquisition after the deal closes.
We view this acquisition as a long-term positive; though the costs may behigh, the opportunities in digital casual gaming are large and growing much faster than EA’s (NASDAQ:ERTS) traditional packaged goods business. PopCap strengthens EA’s leadership in casual gaming and accelerates EA’s progress toward its goal of $1 billion in digital revenue.
With cost control, share buy back, and growth in digital, we think EA (NASDAQ:ERTS) can grow earnings by $0.20 or more each of the next two years.
Michael Pachter is a video game analyst at Wedbush Morgan.