What EA going private may mean for you, the Extra Points Reader

Good morning, and thanks for spending part of your day with Extra Points.

Last week, Wall Street news dropped that shook all corners of the Extra Points extended universe, from college sports industry professionals to video game nerds. Electronic Arts, the mega-publisher behind “EA Sports College Football,” “Battlefield,” “Madden” and a ton of other games, is going private.

The company announced an agreement to be acquired by the PIF, Silver Lake and Affinity Partners in a deal valued at $55 billion with a B dollars. This would be the largest private equity buyout ever. 

Silver Lake is one of the largest private equity firms, with stakes in related entities like City Football Group, Fanatics, Diamond Baseball Holdings, Dell Technologies and more. Affinity Partners is a Florida-based investment firm led by Jared Kushner, the son-in-law of President Donald Trump. And the PIF, of course, is the sovereign wealth fund of the Kingdom of Saudi Arabia. The PIF previously owned a 9.9 percent stake in Electronic Arts.

This deal technically needs regulatory approval before it becomes super finalized, but c’mon — does anybody expect Trump to find a way to kill a deal that involves his son-in-law?

This is a complicated transaction, and I wanted to make sure I better understood why this was happening before I wrote out any sort of #take. Now, after a few days of reading everything I could and talking to some Serious Finance Professionals, let me try to explain what actually happened — and what this means for anybody who has a connection to EA and its assorted products.

Here are the answers to some of the questions I assume you might have:

Of course, as an Extra Points reader, I am already deeply familiar with private equity, leveraged buyouts and corporate transactions. But let’s just pretend for a second that I’m not. Can you explain what any of that stuff means?

I’ll do my best.

Previously, Electronic Arts operated as a public company, listed on the stock exchange. Anybody, from a large institutional investor like the PIF to regular folks like you and I, could buy shares.

On paper, public companies are supposed to be fundamentally accountable to shareholders, which can create pressures for leaders to prioritize short-term stock performance over longer-term company health. Theoretically, if a company goes private, it is then only accountable to its internal shareholders, who could have other priorities or repayment schedules. That might allow a company to undergo significant restructuring or make major changes without getting screamed at for missing third-quarter earnings targets.

Private equity firms — and I recognize this is a massive oversimplification, but stick with me here — typically acquire companies they believe are underperforming in some capacity. Thanks to a combination of cost-cutting, superior management, scale efficiencies across a PE’s investment portfolio and revenue growth, the purchased company becomes more valuable, and the PE firm can then sell its investment stake for a profit.

There are some private equity firms that are comfortable buying part (or all) of a company for a long time. (Silver Lake has done this before.) But typically, these are not meant to be long-term holdings.

A leveraged buyout means that Silver Lake, the PIF and Affinity didn’t just show up at EA headquarters with a novelty sized check for $55 billion. They are also borrowing money against future earnings of the company they’re buying to pay for the transaction. In this case, $20 billion will come from debt — debt that will sit on the “books” of Electronic Arts.

Kieran Kelliher, a business professor at Northwestern who specializes in sports business, finance, accounting and economics, told me that “as far as leveraged buyouts go, this transaction is relatively conservative. Sometimes, buyouts could be more than 70 percent financed by debt.” In this deal, it appears that less than half of the total transaction is debt.

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