EA Agrees to $55 Billion Sale in Largest Leveraged Buyout on Record

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1:56Paul Sweeney:Again, the big story on the M &A front, Electronic Arts going public via an LBO. How about that, kids? $55 billion. J.P. Morgan advising Goldman Sachs on the other side of the deal. J.P. Morgan earning a$20 billion check to get this deal done. What's it mean for the gaming business? Nathan Nadeau joins us here, Technology Research Analyst for Bloomberg Intelligence. He's based in London. Nathan, how's this price tag look for you? How's the valuation here?

2:24Nathan Naidu:So the valuation is at a 20 % to 30 % premium versus the last recorded market cap before this deal was announced. And it seems like it's a premium deal, but actually EA has a lot going for it. It is actually launching a new Battlefield game, and there's a strong prospect for this game. And actually, the game is now in pre-release. And even then, it has already smashed all prior records set by the biggest game in that genre. And that genre is first-person shooter. And that game that has dominated that genre is Call of Duty from Microsoft. So Battlefield 6 is looking to be a successful launch. And next year, we have FIFA.

3:05Nathan Naidu:And obviously, we know that EA has the biggest soccer game in the industry, and that's FIFA. What was called FIFA, but now it's called EA Sports FC. And next year, FIFA World Cup will be a special one because it will be hosted across three cities, including the U.S. And if people don't know, U.S. is actually the biggest market in terms of revenue for all kinds of sports games. So that's the second thing going for EA that I think is going to lead to at least two rounds of consensus beats on EPS earnings per share. So I think for EA, this is actually a good deal. And we can talk about the common struggles faced by game publishers and how these deals would make sense for EA as well as the investors in this context.

3:50Scarlet Fu:So, yeah, let's do that, because you mentioned a bunch of the titles and these are very valuable franchises. This is a top quality IP, whether it's EA Sports FC, Madden NFL, The Sims Battlefield. What does ownership by private equity, by private investors, allow EA to do that it can't do as a publicly traded company?

4:11Nathan Naidu:I think it's all down to funds. So publishers, game publishers in general, have been facing two struggles. First one is gamers' attention span and playtime are increasingly getting limited. The reason is people are sticking to brands or franchises that they have played for a long time. And in fact, NewZoo published a data saying that 80 % of playtime tend to go back to the 60 or so titles, leaving only 8 % of playtime for brand new IP. And this is actually in favor of EA because we mentioned those valuable IP. In fact, if we look at global unit sales, EA has four of those top 20 selling IP globally.

4:55Nathan Naidu:It has four out of the 20. So that is actually a pretty enticing thing for companies like private equity because profit generation is key. And what this means is that EA has franchises that can bring in recurring revenue. We talked about EA Sports FC. We talked about Madden MFL. And they actually revived a new franchise, College Football. And it was one of the best-selling titles in the U.S. last year. So recurring revenue is key here. And the second struggle that I was going to go into is development cost. It's really high, especially in the U.S. So that means that Western publishers actually have a cost disadvantage when compared to Eastern developers.

5:36Nathan Naidu:For example, salaries for game engineers in China is more than half the level in California. and personnel cost game engineers is a huge part of developing a game. So, you know, Tencent actually launched a new game in the same genre as Battlefield 6, and that's Delta Force. It's doing really well. And what that cost disadvantage is stopping EA from is continuously to push out a strong cadence of content to essentially extending the shelf life of any game. And Eastern developers can do that better because of that cost edge.

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9:50Paul Sweeney:Carnival Cruise Line raised its full year earnings forecast for the third straight quarter, citing a record pace for forward bookings and improving net yield. So what's the stock do? It trades off 3.5%. Go figure. Maybe our next guest can help us out here. Brian Neger, he covers his gaming stuff, the lodging stuff, the cruise stuff, all the fun industries out there. He's been doing it on Wall Street for a very long time. One of the top folks in the street and his industry. He's Bloomberg Intelligence, joining us live here in our Bloomberg Interactive Broker Studio. Brian, Carnival, it seems like, I don't know, pretty good quarter for them.

10:21Paul Sweeney:What'd you hear?

10:22Brian Egger:Yeah, very strong third quarter. You know, the 50 % book for next year. So on the surface, these results are really good and it was initially a bit of a head-scratcher to see the sell-off, I think there are two ways in which maybe they're being perceived as conservative. The one is that their yield growth guidance for the fourth quarter, while it's certainly very solid in there in the mid-fours, with a little bit below consensus, maybe the streak got a little bit ahead of itself. The second thing is for all their optimism about bookings and direction of yields, they are very conservative in how they're deploying capital.

10:53Brian Egger:They've only got about 1 % annual yield growth for this year. the next two years. So they're growing very effectively, but they are also very measured in how they deploy capacity. So all this is really good, but they do mention that they can afford to, they can really be judicious on expense growth because they're only growing capacity at a very modest pace.

11:13Scarlet Fu:Is that a bad thing to be conservative? How does Carnival compare with Norwegian or Royal Caribbean? Yeah.

11:19Brian Egger:So if you look at Norwegian, Royal Caribbean, they're anticipating or actually scheduling about a mid-single digit call, 5 %-ish level of annual capacity growth for for 2026, 27, 28. You know, it's closer to one percent for Carnival, maybe two percent in 2028. So they're just taking a more conservative tack. And I think they're equally long term optimistic about their ability to penetrate the vacation market, but they're going about it in a much more measured way. And in that sense, it could strike people as conservative.

11:49Paul Sweeney:Talk to us about capacity. I mean, if they added a couple of ships, would they sell them out?

11:53Brian Egger:Yeah, I mean, certainly their occupancy is back to pre-pandemic levels. Their yield growth against that capacity increase is positive. And we've seen steadily increasing yield expectations throughout 2025. And they've got the free cash flow, but I think they just want to build this out slowly. You know, maybe strike some people as being too slowly.

12:13Paul Sweeney:Hey, not for nothing. This CEO got paid a lot of money here. Josh Weinstein,$14 million in cash compensation for Caldeira 24,$14 million in stock,$28 million to drive a cruise ship around. That's not too bad.

12:25Scarlet Fu:Nice job if you can get it, right? Not bad. So here's my question to you, Brian. How do Royal Caribbean, Norwegian Cruise, and Carnival, how do they grow their market? Are they stealing from each other, or is there still a big base from which to grow?

12:38Brian Egger:There's definitely a penetration opportunity. I might just back up for a second. On Carnival, their goal is to become investment grade. So part of the conservatism I think you're seeing, which may be a head scratcher, is they want to get their investment grade. And I think that's probably priority one, shifting some of the enterprise value from bondholders to equity holders. That being said, yes, they see opportunity to grow a relatively underpenetrated overall vacation market, but they're going about it with kind of balance sheet being front and center, if that helps at all. Yeah.

13:08Paul Sweeney:The only thing I know about the cruise business is what I learned from Disney, who got into the business 15, 20 years ago. And it's been a great business for them. How do you stratify the cruise market? Now, I'm going to be the very, very top, mind you. But how does the cruise industry kind of stratify itself?

13:24Brian Egger:Yeah, I mean, I think they, I think, convincingly argue that they are a relatively affordable form of vacation. It's a package product. The value is very good for the consumer. but it runs across different tiers from luxury side, you know, Seabourn, Windstar, Bushiana, Region 7 Seas to the more mass market like Carnival Cruise Line, right? So they run the gamut, but the overall spectrum tends to be generally, you know, relatively affordable. And part of that package vacation product, people buying cruises beforehand, buying stuff on the cruise with a good share of wallet left over, you know, that works to their favor.

13:59Scarlet Fu:How brand loyal are cruising fans? I mean, if you are a carnival person, are you a carnival person for life?

14:06Brian Egger:Yeah, there's certainly some brand loyalty. And remember, they've got kind of as an industry, companies have two goals. One is to drive bookings for their particular brand. And they do that through new hardware with all the bells and whistles. The other is to drive the overall awareness of the value of cruising relative to other forms of vacationing. And so, you know, they've kind of got that dual mandate.

14:28Paul Sweeney:So you're sitting on the Jersey Shore Sunday afternoon around 5, So if you're Paul Sweeney sitting on a cruise. Okay, go ahead. Every Sunday during the summer, you'd see this massive cruise ship coming out of New York Harbor. I think it's the Star of the Seas.

14:42Brian Egger:Yeah, that's a new one. I mean, things are massive, dude. And they filled that thing up. Just remember, that's a Royal Caribbean ship. But I will point out that one of the things Carnival is pointing to is they've reached the 13 % return on invested capital this year. So they're kind of getting to that double-digit return pace that they targeted. So their argument would be that they fill it up, they get good pricing, and relative to their investment, they're getting solid low teens returns on incremental invested capital with an opportunity to take that higher. So as long as they can get that return, I think they can convincingly say we're getting there.

15:17Brian Egger:But obviously in the case of Carnival, through relatively conservative capital deployment.

15:21Paul Sweeney:I mean, star of the sea, icon of the seas, they have a massive passenger capacity with the ability to hold over 7 ,600 passengers and a large crew. And for somebody who doesn't like people like me, that's a tough sell.

15:35Brian Egger:No, it's not the misanthrope's favorite vacation activity, but, you know, they do get good economies by absorbing those fuel costs.

15:42Paul Sweeney:How big those things are.