Video game developer and publisher,
Electronic Arts Inc (
is reportedly up for sale. According to a recent news feed from the
New York Post, private equity players KKR and Providence Equity
have shown keen interest in buying the video game maker. EA shares
jumped 5.5% in response, closing at $13.81 on August 16, 2012.
According to the New York Post, the private-equity firms are
rumored to have offered $20 a share, which is approximately a 45%
premium to the closing price of $13.81. Since the discussions are
at a very preliminary stage, EA has declined to provide any
Redwood City, California based EA is well known for its popular
franchises such as
and many more. However, declining retail sales due to the ongoing
transition from the physical to the digital platform and the
emergence of free-to-play games has hurt EA's top-line and
profitability growth over the last couple of years.
U.S. video game retail sales declined 20.1% year over year to
$548.8 million in July 2012, the eighth consecutive month of
decline. Sluggish consumer spending on packaged goods has been a
major factor behind this decline. According to market research firm
NPD, overall consumer spending dropped 16% annually in the second
quarter of 2012.
Online gaming is expected to witness growth at the expense of
retail sales, given the growing popularity of digital distribution
and free-to-play browser games. Consumers are increasingly spending
more on smartphones and portable devices (such as the iPad) as
compared to traditional devices for playing online games.
Although EA has been steadily increasing its presence in the
digital segment by offering its popular franchises online, they
have not attained much success in terms of monetization to offset
the significant loss from the packaged goods segment.
In the recently concluded first quarter of 2012, revenue
declined 6.0% year over year despite the 55% jump in digital
revenue (66% of total revenue) being fully offset by a 25% year
over year decline in publishing and other (30% of total revenue)
and 83.0% decline in distribution revenue (4% of total
Moreover, consumers' reluctance to spend has compelled EA to
provide most of its online games for free (in order to attract more
subscribers), which has significantly hurt its profitability. EA
reported an operating loss of $220.0 million in the first
EA expects that the increasing online subscriber base will boost
its revenue from the sale of virtual goods going forward. The
company also expects to earn significant advertising revenue over
the long term.
However, we believe that EA's online games face significant
competition from social and casual game providers such as
Roveo (makers of Angry Birds) and many other small application
developers who not only update their game content and features but
also introduce new games on a regular basis.
In this regard, we believe that EA is handicapped by the limited
number of new games in its portfolio. The company continues to
publish digital versions of its existing franchises, but being
mature, these games are naturally not doing as well as new ones
from others. We believe that this is going to hurt its attempt to
attract online subscribers, thereby negatively impacting revenue
growth going forward.
Currently, on a year-to-date basis, EA shares are down 35.2%
compared with a 10.8% increase for the S&P 500 and a 2.6%
. EA is trading at a premium to most of its peers on a Price to
Earnings, P/Sales and PEG basis. The current offer of $20.00
equates to a P/E of 31.7x, a significant premium to the current P/E
multiple of 21.9x, which investors may find attractive.
We remain Neutral over the long term (6-12 months). Currently,
EA has a Zacks #3 Rank, which implies a Hold rating over the short
term (1-3 months).
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