Saudi Arabia’s purchase of EA has been finalized, and that’s bad news for everyone

Electronic Arts has announced that it has successfully closed the sale of the company to a group of investors that includes the PIF, Saudi Arabia’s Public Investment Fund; Silver Lake and Affinity Partners. At $55 billion, this is the largest leveraged buyout in history, which already makes it an important event even outside the video game industry. But also a terrible event.

Why? Because there is no good news for anyone in this event. A leveraged buyout is never good news, especially considering who’s involved. And that’s what we’re going to break down. Because this is horrible news for the industry, for EA’s workers, and also for us, as consumers and players, who are going to see how our options are going to get dramatically worse in the near future.

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A kind of deal that shouldn’t be allowed

To begin with, the acquisition is happening through what is known as a leveraged buyout. Very common before the 2008 crisis, but today looked at with suspicion and rarely used, this kind of deal involves the buyer putting up part of the money and paying the rest of the purchase price in debt. It does this through a loan from banks or private investment firms, whom it seeks to repay through the money the company generates with its profits.

This tactic was used before the 2008 housing crisis to make massive property purchases and also to camouflage toxic assets. The reasoning is that the housing market never declines and, by extension, worthless properties could be bundled together with highly valuable properties that compensated for them. The debt money was going to be recovered because real estate never goes down and debt always ends up being paid. Until it didn’t, a global crisis so severe happened that we still feel its effects and there is still today a deep suspicion surrounding this kind of deal.

In fact, the purchase is suspicious. EA is a company with 1.49 billion in debt: under any circumstances, it is not attractive for an acquisition. Given that JP Morgan has extended $20 billion in debt financing for the purchase, that puts the company at $21.49 billion in debt. And it does so, moreover, without a good reason for JP Morgan to get into this business.

There are only two reasons, in fact. The first is the idea that the global growth of video games is perpetual. Even though it has reached a point of obvious stagnation after years of nonstop growth, after in 2020 it had massive growth for reasons unrelated to the industry —that is, that everyone was locked in their homes because of COVID-19—, they believe that growth will rebound strongly in subsequent years. The second is one that makes much more sense. J.P.Morgan is one of the few American financial institutions with strong ties to Saudi Arabia, with a history linking them for more than a century. Which suggests that there is something more behind it.

We have no proof to say that J.P.Morgan know that at EA they are never going to be able to pay the debt they have taken on with them, but it seems doubtful that if we know it some of the biggest financial analysts in the world don’t know it. Something that suggests that, with close ties to the Saudi regime, their interests lie elsewhere. Not financial, but commercial. Maintaining stability in a relationship and perhaps more certainties than it seems.

Why make an investment you know you’re not going to recoup?

This investment is not going to be recouped. It’s impossible. EA is never going to be able to generate the amount of profits necessary for that. That leaves us with two possibilities: now that it has become a private company and the PIF has 93.4% of the shares, that the Saudis may be able to squeeze as much revenue out of it as possible; or that, under the previous premise, the PIF has different plans from generating money and J.P.Morgan, Silver Lake and Affinity Partners want to keep Saudi Arabia happy. Both make sense and, surely, the answer lies somewhere in between the two.

EA has been characterized by having very aggressive monetization. The introduction of loot boxes, cards, and micropayments inside its games are standard practice and have only intensified over time. Its most profitable game being EA FC, precisely because of the amount of in-game purchases it has that make it function, practically, like a giant Skinner box: converts its users into addicts by conditioning them so that, if they don’t pay, they can’t keep playing as they did before.

All of that they can amplify to an even greater extent than they already do in many ways. Even more micropayments, in even more titles, but they can also add new forms of monetization. Some of them, they have already hinted at. For example, they have said that their intention is to introduce personalized ads inside games, aiming for brands to pay to appear because their products are featured in them. And as recently as 2021 they were telling their investors that NFTs were the future and that they were going to exploit them. Something they did in titles as popular as EA Madden NFL, at least until 2023.

But that is not the only purpose Saudi Arabia may have for this purchase. It may also have another: to whitewash the country’s regime. A regime where slavery is legal, where executions are the norm, where discrimination is rampant in every sphere, and which, on numerous occasions, has been linked to human rights violations.

To clean up its image they have used video games and sport systematically. For example, they acquired EVO, the biggest fighting game tournament in the world. Also SNK, a much-loved video game company, and they even put Cristiano Ronaldo into Fatal Fury because he was a striker for Al Nassr, a team in the Saudi Professional Football League. And Ubisoft in its recent Assassin’s Creed Mirage introduced, free of charge, an expansion set in the Al-Ula region financed by the PIF. The reason? To promote tourism in that area.

What we lose in the process

It is obvious that when the PIF makes this purchase it has a clear purpose: maximize profits while whitewashing the regime’s image. Oil is not infinite. The rest of the region’s natural resources aren’t either. They need not only to diversify their investment portfolio, but also to become respectable business partners so they can do business abroad. And they need to do it in the next ten years or find themselves in serious trouble.

Can J.P.Morgan recover those 20 billion dollars? No. Or not directly. It can probably recover a substantial part of them through extremely aggressive monetization of the titles, through the slow dismantling of EA —selling IPs, studios, properties—, and also, through other indirect benefits: the business the Saudis offer them in exchange for having financed this debt that they know they will not be able to pay. Because, and this is the secret of leveraged debt, everyone knows these debts cannot be paid. The question is what you gain from it not being able to be paid.

What J.P.Morgan gains, like Silver Lake and Affinity Partners, seems obviously to be tightening its relations with Saudi Arabia. Plus whatever may happen behind the scenes. For Saudi Arabia it is cleaning up its image and being able to do more profitable business in the future, when they are not considered a country that violates human rights and that it’s unacceptable to work with, because they’re Cristiano Ronaldo’s people, EA’s people, WWE’s people. And if along the way they can make money from video games, that’s all the more for them.