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Electronic Arts Inc. (NASDAQ:ERTS) has announced what is roughly an $800 million diluted (before any long-term debt absorption) agreement with Elevation Partners to acquire VG Holding Corp., the owner of both BioWare Corp. and Pandemic Studios. This acquisition is meant to give EA a stronger competitive position in key genres in interactive entertainment: action, adventure and role-playing games.

The two studios have been recognized for creating some of the highest-quality games in the industry.  BioWare Corp. and Pandemic Studios have ten franchises under development, including six wholly owned games. BioWare Corp. is currently developing the highly anticipated Mass Effect, which will be published by Microsoft in November (NOV. 20), and is in the early development stages of a massively multiplayer online game (think EverQuest or WOW, but not those per se).  Pandemic Studios and BioWare Corp. employ roughly 800 people across four studios located in Edmonton, Canada; Los Angeles; Austin; and Brisbane, Australia.

EA will pay up to $620 million in cash to the stockholders of VG Holding Corp. and will issue up to an additional $155 million in equity to certain employees of VG Holding Corp., which will be subject to time-based or performance-based vesting criteria. EA will also assume outstanding VG Holding Corp. stock options. In addition, EA has agreed to lend VG Holding Corp. up to $35 million through the closing of the acquisition.  The transaction is supposed to close in January 2008 and will be dilutive to EA’s 2008 EPS by $0.30 to $0.40 on a GAAP basis and by $0.05 EPS on a non-GAAP basis. 

Microsoft’s (NASDAQ:MSFT) Halo 3 is well over $300 million by now in sales for the first two weeks and the path for Bungie Studios to become its own independent company is going to potentially shake up the industry.  Sure sounds to me like they want their own version of Halo or WOW to me……..

We have been reviewing this upcoming "launch" of Bungie into its own company.  There are still more questions than there are answers.   But this will create a unique special situation investing scenario that will be made available first to subscribers of our Special Situation Investing Newsletter.   Shares of Electronic Arts closed down 2% at $58.69 today, but shares are down another 2.5% at $57.25 in after-hours trading.

Jon C. Ogg
October 11, 2007

Jon Ogg can be reached at [email protected]; he produces the Special Situation Investing Newsletter and he does not own securities in the companies he covers.