EA's stock catches downgrade as blocked Microsoft deal for Activision eliminates 'takeout premium'

By Wallace Witkowski

Free-to-play in-game purchase model has never undergone economic stress test, BMO analyst notes

The blocking of Microsoft Corp.'s acquisition of Activision Blizzard Inc. by U.K. regulators has thrown cold water on any potential large deals in the videogame space, prompting one analyst to downgrade shares of Electronic Arts Inc.

In a Thursday note, BMO Capital Markets analyst Gerrick Johnson downgraded EA (EA) to market perform from outperform and reduced his price target on the stock to $125 from $150 to account for a reduction in the implied "takeout premium" for EA following the blocking of Microsoft's (MSFT) $69 billion deal to buy Activision Blizzard(ATVI).

"A key component to our outperform thesis was consolidation in the video game industry," Johnson said. "We think large tech firms are eager to bolster video game offerings. But, we think the tumultuous and costly [Microsoft/Activision] experience, culminating with a critical U.K. rejection, could dissuade potential suitors from attempting big, multibillion-dollar deals, perhaps turning towards more bite-sized, sub-$1 billion deals, thereby reducing the takeout premium built into EA shares."

When Microsoft made the offer for Activision back in January 2022, a little more than a week after Take-Two Interactive Software Inc. announced its $12.7 billion acquisition of Zynga, it kicked off an M&A frenzy, leading investors to wonder where the next big deal would be.

The videogame industry also faces the problem of reduced spending at a time when many games offer free-to-play versions with purchases that can be made within the game. This model had never been tested during a time of economic stress, Johnson said.

"Now it has, and the test has not gone well," Johnson said. "Spending has been pressured for both full games and [in-game monetization] as consumers' budgets have compressed owing to inflation and interest rates. We expect this to persist."

EA shares didn't take it that hard, however, with the stock price up less than 1% in recent activity, compared with a 1.4% rise in the S&P 500 and a 2.1% gain in the tech-heavy Nasdaq Composite .

Of the 31 analysts who cover EA, 17 have buy-grade ratings and 14 have hold ratings, along with an average price target of $132.24.

-Wallace Witkowski

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04-27-23 1413ET

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