The largest leveraged buyout in history?

0:00If bonds are back today, why wait for tomorrow? At PGM, our fixed income strategies help investors uncover hidden value and unlock opportunities. Whether you're looking to enhance your income or diversify your portfolio, our broad range of strategies bring together local expertise and deep credit research to help you achieve your long-term goals. PGM, our investments shape tomorrow, today.

0:35Pushkin. This week, we have seen what may be the largest leveraged buyout in history. The video games maker Electronic Arts has been purchased for 55 billion American dollars. Today on the show, is this deal a sign of the top or a new dawn for Wall Street? This is Unhedged, the markets and finance podcast from the Financial Times in Pushkin. I am Rob Armstrong, coming to you from an autumnal New York City, joined by the two greatest reporters in the history of finance. It's a show of superlatives. James Fontanella-Kahn is our U.S. finance editor here at the FT. Welcome, James. Thanks for having me, Rob.

1:32Oliver Bad News-Barnes is our U.S. deal correspondent? U.S. deals. There's more than one. And it's not all bad news. It's all just... It's not all bad news. It's good news. It's good news for the EHL. Right on. Okay, Oliver, on that very point, walk us through the structure of this ginagorous deal. Yes. So on Monday morning, a consortium made up of PIF, the Saudi Arabian Sovereign Wealth Fund, Silver Lake, the technology-focused private equity group, and a guy you might have heard of, Jared Kushner, President Trump's son-in-law, wrote a$55 billion check to buy electronic arts, to take it off the public markets.

2:13That's what leverage buyout means. Helped by J.P. Morgan and Jamie Dimon, who stumped up$20 billion worth of debt. Yes. Take us through the players. What is the significance of this cast of characters? Let's start from Jared Kushner, the son-in-law of President Trump married to Ivanka Trump. And he's kind of the Sherpa. He's getting all the parties together. We wrote a beautiful TikTok explaining how the deal got put together. And essentially, it started about early in the year. Jared Kushner, who he's not doing this out of his own pocket, he set up after the Trump one administration ended, set up an investment vehicle called Affinity, which had a mandate to invest in kind of fast growing tech focused companies.

3:01And he got the funding for that venture from? Saudi Arabia. Saudi Arabia. Okay. And we'll get back. This is a complicated deal as a lot of buyouts are, so we're going to take our time to explain this clearly. So you have Kushner, as it were, shepherding the thing through. So he met with one of the co-heads of Silver Lake, who's Egan Durbin. Silver Lake had been looking at EA for a long time. They also have a reputation for being some of the smartest guys when it comes to gigantic - Complex buyouts, especially. Absolutely. Is the specialty of that. They are the best known financial engineers. Definitely on the West Coast, they've partnered with Michael Dell, all the great PCs maker.

3:47And so they are known for being the best in class to get anything of this kind of size done. So Kushner, who's not a tech guy, he's obviously made most of his money in the real estate business, predominantly in New York and Jersey. Went to meet Egan. He said, what do you think about this deal? And Egan said, I'm interested. And obviously, the other key component, PIF, the sovereign wealth fund of Saudi Arabia, was already an investor in EA. They had a 10 % stake. So at that point, Kushner, who had the relation with Saudi, which is kind of one of the main contributors to his private equity fund, He went and knocked on the door of the Saudis and said, hey, MBS, my dear friend, how about we do a deal and we buy out this company and kind of transform it, make more money together, help you diversify your country away from oil and gas, which is one of the big things that Saudi Arabia's crown prince MBS has been trying to do.

4:55So, again, a lot of people involved. But they managed to get the interests aligned. One thing I was struck by, Oliver, is with every leveraged buyout, there's a discussion of the split in the deal between debt and equity. How much debt money is being put in to the$55 billion? How much equity money? And there was a lot of equity money in this deal. It seemed high to me. I was struck by how high it is. Kind of like a somewhat leveraged buyout. Yes, a moderately leveraged buyout. A moderately leveraged buyout. Yeah, I think it's a consequence of you always hear about the private equity industry and the amount of dry powder that they have to put to work.

5:32And if you go through the FT archives, Egon Durbin sat down with our esteemed colleague Antoine Gara a couple of years ago, saying exactly this, that Silver Lake had the ambition to write big checks and place, you know, a few concentrated bets on companies. And that's exactly what they've done. And I think there's a trend unfolding where the balance of debt versus equity in these deals is tipping a bit more towards equity because they have a lot of dollars to put to work, right? And particularly when you've got Saudi Arabia involved, they also have a lot of money to put to work. That makes the deal safer, right?

6:07I mean, you have more equity in there. A hundred percent. You don't have that interest expense looming over you every month or every year that the company has to pull along. You know, it makes it a billion. Still, a lot can go wrong. Yeah. That's true. It was a short period of due diligence, though. I mean, JP Morgan made a decision to put up the$20 billion within a few days. Yeah. We're making calls yesterday frantically to find out how this deal got put together. And just so that our listeners can get a sense of the timing, essentially the first bid, after they met early in the year, Silver Lake, the Saudis, and Kushner, they then made a bid in September.

6:47around Labor Day. That bid was rejected by EA's board, but they kept it quiet. And then a new bid arrived about 14 days ago, 10 days ago, which was much higher. And then they had to figure out the financing, the debt portion, and Kushner, the Saudis, and Egon Durbin of Silver Lake decided we want to make one call to one bank for one check. And who do you call when you need a big check? The Sun King. Absolutely. The banker of America, Jamie Dimon. And him being able to put up 20 billion or being willing to put up 20 billion, it's a little bit like having Warren Buffett money. It's a little bit like the Pope putting a blessing on the deal.

7:36So that gives it a positive angle. As Ollie was saying, not a lot of due diligence. It was done in seven days. So let's do a little due diligence ourselves. What kind of shape is EA in? Is this a strong business? It's certainly struggled a bit on the public markets. Like its share price has declined over the past few years. EA has like a rich stable of content. And I'm sure you're eagerly anticipating the launch of the new Battlefield series. I know. Or maybe your kids are. Yeah. But, you know, EA lives or dies by that content. And it does have a rich stable of content. It has the Madden game.

8:11It has the Madden NFL games. It has EA Sports FC, which is the rebranded FIFA, and The Sims, a whole bunch of stuff. So, yeah, there's the potentials there. And also, it does spit off quite a lot of cash. And I think - About$2 billion a year in the last couple of years. Private equity loves that. Yeah, yeah. So$2 billion a year comes squirting out of this thing, which can support quite a lot of debt. I'm not sure the whole debt package, though, is quite a large one. Yeah. And they clearly have ambitions for it. I mean, the sense that we got from the buyers is that they're now going to go and do other deals off the back of this, right?

8:46It's a platform, as they say in private equity. They're going to attach other games companies to it or whatever. Because the name of the game is Scale. And the other name of the game is AI. Yeah. And we can get into that. I wanted to talk about it. Let's get into it right now. This was something that came up a lot in your stories that there is an idea here that this is an industry or a company that AI is going to transform. Do you buy that idea, gentlemen? It makes sense, right? I mean, I'm not a video games developer, right? Right. But, you know, if you move from a model where you have to have a human being intricately designing every player on EA Sports FC, and instead you can just put it through some AI and, you know, render those players.

9:26It can cut out a lot of the cost base, right? It's a margin expansion story in some way. Exactly. Exactly. And I'm sure that's something that the consortium is thinking about, particularly Silver Lake, because I don't think they'd want to lose money on this. I do think we should step back from this. And I don't think this is your standard LBO. I mean, everyone talked about TXU, right, which is eclipsed in terms of value. Yeah, which was a disaster, by the way. This as an old guy, this was the first thing I thought of. I saw a$50 billion IPO. It's the top of the market. Oh, my God, it's TXU2, which was a big energy company.

10:01leveraged buyout in 2007. I was 12 at the time. Oliver was 12. I was a young man of 70 when the deal came out. I was in my second year at the FT. But I don't think this can be understood as your conventional communal garden LBO, right? Yes, I think that's fair. The Saudis, in pushing to diversify away from oil and gas, have been aggressive buyers in like the luxury hospitality space, in entertainment, in tech. They've even bought a bunch of other gaming companies and they own public equities and a bunch of other gaming companies. And I don't think PIF is thinking, five-year vintage will flip this.

10:45That's not the equation there. Let me ask you this, James. In their history, trying to diversify their wealth, Have the Saudis been the smart money or the dumb money or somewhere in between? It's a tough one to answer straight. I mean, certainly there's a perception that it is dumb money. And I think the Saudis are very aware that they're perceived this way and they don't like it at all. Who would? They feel that they have been taken for granted in many instances. And so having picked as a partner Jared Kushner and Silver Lake, what they're trying to do here is to kind of get some protection and not to be treated as dummies.

11:31I don't think they've got the arrogance to say we're the smartest guys in the room. They are trying to diversify. So that's a process. And they're looking for partners. In this case, somebody like Jared is kind of an important geopolitical partner. He's been involved in peace negotiations in the Middle East, as you know. He's got a personal relationship with MBS. So that gives them cover that they will not be taken for a ride on the politics side of things. and on the financials, they think Egon Durbin is known again, as I mentioned earlier, as one of, if not the smartest guy when it comes to complicated, layered deals and he's always made money or mostly made money.

12:18And so they think we want to be with a guy that if he's making money for himself, he's going to make money for us. Obviously, it doesn't always go that way. Yeah, you have to make sure you're on parallel footing. Exactly. But let's focus in on Kushner for a second. I mean, one thing that's very clear, and this came up in the FT, is that it doesn't hurt when you're trying to do a huge deal in which mostly foreign money is buying a huge American company to have the president's son-in-law on board. And, you know, to put it with maximum crudeness, is it quite all right to have the president's son-in-law cash in on that status as like a matchmaker in the world of money and as it were selling the Trump imprimatur?

13:11Is that the word? The stamp of approval. The stamp of approval. Is this all quite right? Well, I suppose this is the new world we live in, right? Isn't it? I mean, if you look when Kushner fostered those relationships with Saudi, it was during the first Trump administration. And clearly, that's a big part of his value to this deal. But he wasn't just like brought in as a foil, you know, for this deal. He conceptualized it in some way with Silver Lake. And then they said, you go to PIF and bring them in. But no, for sure. I mean, one of the themes in kind of covering deals at the moment is an adjacency or ability to barter with the current administration.

13:53And, you know, it's easier for them to sell this deal if Jared Kushner is involved than not. and it's a big buyout of a US company by a consortium involving a foreign buyer. So it'll be looked at by CFIUS, the Committee on Foreign Investment in the United States. And it's not like a big infrastructure deal or something like that. So it's probably unlikely to like really flash red warning signs for CFIUS. But you would imagine Kushner's involvement might ease the path a little bit. If I can interject on that, and I agree with everything Ali has just said, on the previous administrations, There's no doubt that a deal of this kind would have gone through meticulous scrutiny by the body that Ali mentioned.

14:39CFIUS. CFIUS, which essentially looks at all the foreign investment that is done in the US from a national security perspective. This is a video game company. It's increasingly, it's got a data component inevitably. Yes. And so you want to make sure that this foreign buyer is not misusing the data of US citizens. And it's important to underscore that Saudi Arabia is an important, if not the most important ally of the United States in the Arab world. So it's not a hostile country. It would be a very different deal if a Chinese company was trying to buy EA. Correct. So we need to make that distinction.

15:21But we should also bear in mind that Saudi Aramco could not list in the U.S. because there were a lot of questions about the Saudi government's involvement in 9-11. That's why the personal relationship with Jared Kushner is so vital to this deal. I mean, you guys are reporters. I'm an opinion writer, so I can say this. This version of capitalism where adjacency to the presidential administration is a crucial or, in any rate, a very beneficial component of any large deal. This makes me acutely – as a capitalist, this makes me acutely jumpy. I don't like this version of capitalism. But perhaps it was always like this, that you always needed political relationships to do deals of this nature and this size.

16:10and it's just more visible now under the Trump administration. Do you think that's possible? I don't know. I think it's fair. Yeah, yeah. With everything that Trump does, there's a kind of a crudeness to it. But yeah, I think he would agree with that. This is how business has always been done. I'm just being more transparent and honest about it. There is no deal of significance that doesn't have a Trump angle. I mean, we can, from Intel, U.S. Steel. The railroad merger. The railroad. I mean, it's just, but it's also true that the previous administration of Joe Biden blocked a lot of deals. Like, think about the role that Lena Kahn, who was the antitrust regulator at the FTC, played in shaping, using dealmaking as a way to push certain kind of - Industrial policy is what it was.

17:01Social policy or justice, social justice and correcting other wrongs in society. So we shouldn't pretend that Trump is an anomaly. I mean, politics has always played a role in business. Listeners, we'll be right back with Long and Short.

17:30Speaking of alternatives, PGM's monthly podcast discussing trends and strategies in alternative investing. We've seen a lot of growth in the evergreen structures. They had become the most dominant structure within alternatives, supplanting the traditional 3C7QP closed-end fund. And we think that demand will continue. And that's making all more accessible to wealth. Hear the full conversation on P. Jim's podcast, Speaking of Alternatives. Welcome back. This is Long and Short, which is the portion of the show where we go long things we like and short things we don't like. Oliver, are you long or short something today?

18:09Long something. Right on. Make us rich. What do you got? I am long the Trump-inspired M &A boom. Woo, there's going to be deals. There's more to come. Yeah, there was some uncertainty. There was some jitters early on a la Liberation Day. But what we see right now is there's a world in which a lot of companies are seeing the opportunity to do big deals. Yes. And I think that's a trend that is going to continue. James, are you long or short something? Big short. All right, hit me. I'm taking the short on Ollie's long. I love that. Oh, God. And I have to say - So it's not going to happen. Why is it not going to happen?

18:45I've been bearish on this kind of return of animal spirits. And I agree. We're starting to see people thinking unthinkable. But there's one thing that is never good for deal making, and that's uncertainty. And Trump is the emperor, the king of uncertainty. And something will go wrong. We'll have a massive freak out. And M &A will go into another. Holly and I will be taking long holidays and stuff. All right. Well, today I am long old people smoking pot. I don't know if you guys noticed this this week. That you're high? I've been talking about it all. Well, I'm not talking about myself, but thank you for thanking me, Oliver.

19:32I'm talking about the fact that cannabis companies got a huge boost when the president, about who we've been speaking so much today, posted a video from a consortium that supports the idea of using cannabis as a health care alternative for old people. And I just think, you know, once you get to a certain age, whatever works, man. It's a nice full circle moment, too, because there's no better compliment to a video game than a spliff. So, yeah. So, yeah. Listeners, thank you for tuning into this conversation, whether you are stoned or not. We will be back in your feeds on Thursday. Until then, stay frosty out there.

20:17Unhedged is produced by Jake Harper and edited by Bryant Erstad. Our executive producer is Jacob Goldstein. Topher Forges is the FT's acting co-head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

20:58Thank you.