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Electronic Arts Makes Deal To Buy PopCap

July 13, 2011

Video game publisher Electronic Arts Inc. (EA) is set to purchase PopCap Games Inc., the maker of popular games such as Peggle, Bejeweled, and Plants vs. Zombies, in a deal that is valued at as much as $1.3 billion.

EA said on Tuesday that it would pay $650 million in cash plus $100 million in stock for PopCap. It also agreed to pay as much as $550 million should PopCap meet certain profitability milestones over the next three years.

EA sees the deal as a way to ramp up its social and casual games portfolio and better compete with gaming group Zynga.

EA is investing more in digital content as customers are buying fewer games on discs for consoles. Video game companies are now offering users the option to play free or low-priced games on smartphones, tablets and computers — especially on Facebook.

Although EA has been a dominant player in console gaming for a long time, it has made a series of acquisitions to bolster its presence in the growing social network and mobile gaming sector.

And the company thinks acquiring PopCap will give it the edge it is looking for.

Founded in 2000, PopCap is perhaps most famous for its hit title “Bejeweled.” The puzzle game, and its sequels, have sold more than 50 million units in the past 11 years. The gaming company has also struck gold with other popular titles such as “Zuma.”

“PopCap has made lightning strike five times,” EA’s chief executive, John Riccitiello, referring to PopCap’s string of best-selling titles, told the Los Angeles Times.

PopCap has also scored big in the financial department with its portfolio of games. Its revenue, which had been growing by more than 30 percent per year over the last three years, is expected to sustain that pace this year. It is on track to bring in revenue of $130 million, up from $100 million in 2010.

What made PopCap attractive to EA and other companies that bid for the gaming network was its ability to its games on numerous platforms.

For example, the company’s hit game Bejeweled, is sold as a disc in retail stores, as a download for game consoles and mobile devices, and on Facebook as well, where players can purchase “power-ups” to help them score more points. PopCap also receives revenue from licensing Bejeweled to airlines. PopCap also makes money from people who play the game competitively for cash prizes in Britain.

“We’re working on making it so you can play Bejeweled on your refrigerator,” joked John Vechey, PopCap cofounder, during an interview with the Los Angeles Times.

Riccitiello estimated that sales from digital distribution will grow to more than the industry’s revenue within five years.

Eric Brown, EA’s chief financial officer, said the PopCap deal would help the company compete with Zynga, which makes the hugely popular “FarmVille” social network game. Zynga filed with regulators on July 1 for an initial public offering of up to $1 billion.

Acquiring PopCap will give EA “a much stronger presence in social network games,” said Brown.

EA shareholder and associate portfolio manager of the Gabelli Global Multimedia Trust, Larry Haverty, said that once Zynga goes public, the PopCap “acquisition is going to look like the bargain of the century.”

“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, Wooga and Badoo, said Sterne Agee analyst Arvind Bhatia.

Riccitiello said PopCap will help the company reach its target to make $1 billion in revenue from its digital business.

For the deal, EA received $550 million in debt commitments from Morgan Stanley, JPMorgan Chase and UBS. It was also advised by Morgan Stanley and UBS.
The deal is expected to close in August, EA said.
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