Saudi’s EA buyout looks like risky mission creep
30/09/2025 19:30
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to remove broken chart hyperlink in paragraph four. By George Hay LONDON, Oct 1 (Reuters Breakingviews) - Saudi Arabia’s Mohammed bin Salman loves video games. It’s nonetheless surprising that the kingdom’s Public Investment Fund (PIF), which the crown prince known as MBS chairs, is pouring a giant slug of equity into the $55 billion take-private of Electronic Arts EA.O, cooked up with Silver Lake and Jared Kushner’s Affinity Partners. Backing the leveraged buyout of the U.S. games developer, whose titles include Battlefield 1 and Apex Legends, runs counter to the PIF’s recent mission focusing on boosting domestic investment. It’s also far from guaranteed to be a money-spinner. The PIF, admittedly, is no stranger to the industry. The sovereign fund in 2022 earmarked $38 billion of investment by 2030 as part of a plan to make Saudi into a global gaming hub. Since then, the kingdom has hosted the Esports World Cup and spent over $8 billion on U.S. group Scopely and the gaming division of Niantic, winning control of globally recognised titles like Monopoly Go! And Pokémon GO. The umbrella company with responsibility for knitting all this together is called Savvy Games, run by former Activision Blizzard executive Brian Ward. The first wrinkle in the EA deal is that the PIF isn’t currently planning on folding the Californian business into Savvy, a person familiar with the matter told Breakingviews. That’s despite the Saudi state fund being on track to hold a majority stake in EA, as reported by the Financial Times. Instead, the new investment alongside Silver Lake and Affinity has been led by Deputy Governor Turqi Alnowaiser, who is head of international investments at PIF. That’s distinct from Savvy, which sits in the more domestic focused of the vehicle’s three investment buckets. The upshot is that typical M&A “synergies” like cost cuts and revenue boosters may not be on the table here. The inner workings of the PIF may seem arcane. But it speaks to a more important point about where the fund, and Saudi’s economy, is going. The vehicle’s 2024 annual report shows that international investments fell to just 17% of the 3.4 trillion riyal ($913 billion) portfolio, compared with 23% in 2022. So while the PIF is known for flashy bets on overseas assets like Newcastle United Football Club, the real growth area has been putting seed money into local firms and projects, with the aim of boosting the domestic private sector and diversifying Saudi away from oil. The trouble with these investments, and with associated so-called giga projects like the NEOM tourist zone in the north-west of the kingdom, is that any payoff may be some way off. The PIF’s annual return since its 2017 inception as of 2023 was 8.7%, but in 2024 that had fallen to 7.2% thanks primarily to project writedowns. So rather than MBS’s fondness for video gaming, the key motivating force behind the EA deal may be the PIF’s thirst for a juicy private equity-style return. Silver Lake has form in delivering for its partners. Just ask Michael Dell. The catch is that an EA LBO is far from a slam-dunk. The PIF already owns 9.9% of EA, meaning that to get to a majority stake it may only have to put up slightly more than 40% of the overall $36 billion equity check. But that still implies forking out $14.4 billion at the very least. The question is whether the new owners can generate a typical private equity-style 20% internal rate of return on that money. Start with EA’s numbers for the year ending March 2026, based on analysts' estimates compiled by Visible Alpha. The gaming giant is set to make $7.9 billion of revenue at a 37% EBITDA margin. Assume the top line grows at just under 5%, in line with brokers’ forecasts, and that EBITDA holds steady as a percentage of revenue, as analysts expect. EBITDA in the 2031 fiscal year would then be $3.7 billion, implying an enterprise value of $70 billion using the same 19 times valuation multiple as for the acquisition. On that basis, after factoring in interest costs of 8% and a 19% tax rate, the equity would be worth $59 billion, if all free cash flow went towards paying down debt. That would equate to a measly 10% internal rate of return. The PIF, Kushner and Silver Lake no doubt have grander plans, including faster growth and AI-fuelled cost cuts. A group of EA’s rivals – Take-Two Interactive TTWO.O, Nintendo 7974.T, Ubisoft UBIP.PA, Konami 9766.T and Capcom 9697.T – is set to grow sales at a compound annual growth rate of 7.2% on average over the next five years, according to Visible Alpha-compiled estimates. EBITDA margins for the same peer group will expand by 8 percentage points on average, analysts reckon. Assume that EA's sales and profitability rise in line with those numbers instead, and the internal rate of return for the PIF and its co-investors becomes a healthier 19%. That kind of performance may be a stretch, though. The peer growth numbers are skewed by a mammoth expected performance for Take-Two in the year to March 2027, which if excluded pushes the average back down to around 5%. That’s also roughly what EA has achieved over the past decade on average. Chunkier EBITDA margins may be more plausible. But the low-hanging fruit looks limited. As well as analysts' forecasts implying minimal improvement between now and 2031 for EA, the buyout target's 37% expected ratio for the coming year is already above the average 30% for rivals. All this number-crunching is unlikely to unduly bother MBS. Anchoring the world’s largest ever buyout sends a signal of Saudi ambition, and owning one of the world’s most storied gaming groups may go down well with the kingdom’s predominantly youthful population. Nor does it exactly harm Savvy’s push to foster a domestic gaming sector. That said, EA also looks like a return to the 2010s-era PIF, which famously made a $45 billion commitment to SoftBank’s roughly $100 billion Vision Fund 1. The vehicle run by Japanese billionaire Masayoshi Son, as of June, had only generated a 1.3 times multiple of total value to paid-in capital – a measure that compares distributions plus paper asset valuations with the amount of money invested. Meanwhile Capital Economics reckons Riyadh has slashed capital spending on some of its racier projects by 40% year-on-year. And rising budget deficits pushed Saudi debt to 29% of GDP in the second quarter from 25% the previous year. Lower oil prices and production saw the free cash flow at the kingdom’s oil giant Aramco fall. In other words, it’s not an obvious time for Saudi to spend scarce resources on speculative foreign buyouts. Follow George Hay on Bluesky and LinkedIn. CONTEXT NEWS Video-game developer Electronic Arts said on September 29 that it had agreed to be acquired for $55 billion by a group of investors that includes buyout firm Silver Lake, Saudi Arabia’s Public Investment Fund and Jared Kushner’s investment firm Affinity Partners. Under the terms of the agreement, EA shareholders will receive $210 a share in cash, a 25% premium to the company's unaffected price on September 25, the day before the Wall Street Journal reported the deal talks. The transaction will be funded with about $36 billion of equity and $20 billion of debt financing. The Saudi fund will roll over its existing 9.9% EA stake. Electronic Arts' historic revenue growth has been hit and miss https://www.reuters.com/graphics/BRV-BRV/jnpwbdlyzvw/chart.png Electronic Arts shares have failed to keep pace with the wider US market https://www.reuters.com/graphics/BRV-BRV/klvybymzkpg/chart.png (Editing by Liam Proud; Production by Maya Nandhini) ((For previous columns by the author, Reuters customers can click on HAY/george.hay@thomsonreuters.com))