July 12, 2011 – By Liana B. Baker
NEW YORK (Reuters) - Electronic Arts Inc <ERTS.O>, the video game publisher, is buying PopCap Games in a deal worth up to $1.3 billion as it tries to ramp up its social and casual games portfolio and better compete with Zynga Inc.
As part of the deal, EA said it will pay about $650 million in cash and $100 million in common stock upfront for the maker of the popular video games "Bejeweled" and "Plants vs. Zombies." EA could pay up to an additional $550 million if PopCap reaches certain performance targets in about two years.
EA is investing more in digital content as customers are buying fewer games on discs to play on consoles. Video game companies are now offering users options to play free or low-priced games on mobile devices, PCs and Facebook.
EA's Chief Financial Officer Eric Brown said the deal would help EA better compete with Zynga. Zynga filed with regulators on July 1 for an initial public offering of up to $1 billion.
"This gives us a much stronger presence in social network games," Brown said.
Shares fell following the announcement as investors balked at EA's strategy of shifting toward digital games, which make less money than the packaged games it is best known for, such as "Madden NFL," said Brean Murray analyst Todd Mitchell.
Mitchell added that EA, which acquired social-games maker Playfish in 2009 for a deal worth up to $400 million, has also been on a buying spree.
"It seems to me they've been buying a lot of assets lately and paying a pretty high price for a lot of them," Mitchell said.
But at least one shareholder was satisfied with the deal and said that once Facebook games publisher Zynga Inc goes public, EA shares will rise and the PopCap deal will pay off.
"Once Zynga comes out, this acquisition is going to look like the bargain of the century," said Larry Haverty, associate portfolio manager of the Gabelli Global Multimedia Trust, which owns EA shares.
"Outside of Zynga, EA is going to be the only way for investors to play the casual gaming phenomenon," Haverty added.
Zynga's IPO plans along with the acquisition of PopCap has investors searching the landscape for other hot up-and-coming video game publishers, including CrowdStar and Mooga, said Sterne Agee analyst Arvind Bhatia.
EA said the deal would be neutral to earnings per share this year and that it would add 10 cents per share to EA's earnings per share in 2013.
The transaction is expected to close in August, EA said.
PopCap, which is based in Seattle, has been profitable for 10 years since its founding. It generated $100 million in revenue in 2010.It makes easy-to-play games for platforms such as Facebook, RenRen, Google <GOOG.O> Android, Apple <AAPL.O> iPhone and iPad.
EA shares fell 3.4 percent after the market closed on Tuesday. Shares closed at $24.17 earlier on the Nasdaq.
(Reporting by Liana B. Baker; additional reporting by Nadia Damouni, editing by Carol Bishopric, Bernard Orr)