EA deal reportedly funded by high-risk loan, may trigger more layoffs and cost-cutting

EA is going private in a megaton $55 billion deal--the largest leveraged buyout in history. The publisher could become very different in the coming years as a result of the deal, as the new buyout comes with high levels of debt and responsibility.

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When EA goes private in the current deal, the company will be saddled with $20 billion in debt, with JPMorgan making a standalone commitment to raise funds. According to new reports from Bloomberg, the loan is expected to have a single-B rating, indicating a risky loan with higher interest rates.

There's speculation that the new privately-owned EA will tighten its belt even more in order to pay back this debt, which could lead to more layoffs, project cancellations, and hasten the work towards direct-to-consumer AI implementation.

Bloomberg reported Jason Schreier, who has close knowledge of the going-ons of the gaming world, speculates this could lead to aggressive cost cutting from EA:

"The leveraged buyout will be financed by a staggering $20 billion of debt, which likely means some aggressive cost cutting is ahead for EA in the coming months and years.

"A lot of people are (understandably) focused on the Saudi Arabia and Kushner part of this, but the far bigger immediate impact will come from the new private EA being on the hook for $20 billion in debt. That could mean mass layoffs, more aggressive monetization, and other big cost-cutting measures."

Mat Piscatella, executive director at Circana who analyzes the video games industry, also commented on the $20 billion in debt that EA will have to pay back:

"$20,000,000,000 of debt financing is a shockingly large number to have to service, while also transitioning from a public to private organization and all the implications that has on the people that work in it.

"We've obviously never seen anything like this at this scale in the industry before."

Another Bloomberg Opinion columnist, Paul J. Davies, says that the loan to EA is risky, but the publisher has delivered noteworthy free cash flow over the past half-decade:

"The debt will be risky though: After a $2 billion short-term working capital facility, the rest of the $18 billion in debt is at least 7.5-times EA's earnings before interest, tax, depreciation and amortization over the past 12 months, according to a banker familiar with the deal.

"In comparison, the total value including equity in the TXU deal was only slightly higher at about 8.5-times EBITDA- add the equity into the EA deal and the multiple rises to more than 20 times.

"One comfort to EA's lenders is that the business has produced consistently high free cash flow of between $1.7 billion and $2 billion over five of the past six years, according to data compiled by Bloomberg."

The deal isn't expected to close until April 2027 and conditions may change from now until then.

Under this schedule, Electronic Arts will continue reporting its quarterly figures for the next three quarters; Q2FY25 in October, and the Q3-Q4FY25 in the months thereafter.