BREAKINGVIEWS-Saudi’s epic EA bet is easier to fund than justify

By George Hay

LONDON, Dec 3 (Reuters Breakingviews) - Saudi Arabia’s gaming gambit is even bigger than expected. The kingdom’s Public Investment Fund (PIF) is to fund nearly all of a $36 billion equity cheque on the $55 billion take-private of Electronic Arts EA.O, the WSJ reported on Tuesday. That’s more than seemed likely when the deal was unveiled a few months ago – and only underscores how Saudi Crown Prince Mohammed bin Salman’s (MbS) transition away from fossil fuels is taking him in some odd directions.

In late September, the assumption was that the PIF would take a big chunk of EA equity – enough to be comfortably bigger than fellow partners Silver Lake and Jared Kushner’s Affinity Partners. Yet according to a Brazilian antitrust filing the $900 billion Saudi wealth fund will actually hold 93%. Given it already owned 9.9% of EA, that implies the PIF will cough up just under $30 billion in new cash to make the biggest buyout deal of all time fly.

It’s not as if the fund can’t afford this. According to a recent bond prospectus the PIF had as of June $40 billion of cash and cash equivalents like money market funds. It also had another $20 billion of liquid bonds in its treasury portfolio that could be sold, plus around $35 billion of non-strategic equity stakes in foreign companies. With PIF borrowings also under 10% of assets, MbS – an avid gamer - doesn’t need to write a central government cheque to buy EA.

That doesn’t make the deal a brilliant idea. The PIF is supposed to be focused on funding the Saudi economy’s pivot away from fossil fuels, which is why most of its assets are within the kingdom. The EA deal, by contrast, is a massive bet on a foreign company. If Saudi can be sure of achieving the sort of 20% internal rate of return (IRR) expected from private equity punts, the transaction would still help boost the PIF’s long term average annual return of 7.2% since 2017.

But that’s questionable too. Assume EA grows its $8 billion top line at just under 5%, and that EBITDA holds steady around 37% of revenue, in line with brokers’ forecasts. If the PIF were to sell EA in five years’ time on the same 19 times EBITDA multiple it paid, it would make a mere 10% IRR. That’s according to a Breakingviews calculation that factors in interest costs of 8% and a 19% tax rate.

Perhaps AI-fuelled cost cuts can juice this return. But even then, it’s an odd time to be making such a big bet. If an oil market surplus means Brent crude prices slip to $50 a barrel by this time next year, Capital Economics estimates that the Saudi budget deficit will hit 6% of GDP, nearly double Riyadh’s estimate. That would hike public debt from 31% of GDP to 40%. There’s nothing wrong with ambitious punts, but the risks in MbS’ financial gameplay look increasingly hard to square with its likely modest returns.

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CONTEXT NEWS

Saudi Arabia’s Public Investment Fund (PIF) will own the vast majority of Electronic Arts, following its $55 billion buyout in partnership with Silver Lake and Jared Kushner’s Affinity Partners, the Wall Street Journal reported on December 2.

A November filing with Brazil’s antitrust regulator shows PIF would own 93.4% of EA, the WSJ reported, while Silver Lake and Affinity would own 5.5% and 1.1% respectively. That implies that PIF will fund almost all of the $36 billion equity cheque.