EA Swoops in to Buy Codemasters

Electronic Arts’ (EA) potential acquisition of Codemasters — a leader in racing games with IP like F1, Grid, Project Cars, and Dirt — for $1.2 billion may be the acquisition power play of the year. EA is offering to buy Codemasters for £6.04 per share ($7.98) in an all-cash deal, which is expected to close during the first quarter of 2021. The offer comes only a month after Take-Two announced its agreement to buy the company for a cash and stock offering worth $994 million. Once finalized, this will be EA’s first acquisition in over two years and also its largest acquisition ever (previously the largest was PopCap 10 years ago for $750 million).

So why Codemasters, why pay 20% more than Take-Two, and why now? Apart from the fact that Codemasters is a solid business (see their 2020 annual report here), the answer primarily lies in wanting to own a collection of dominant licensed sports franchises and to a lesser extent potential mobile + esports opportunities.

EA has always been synonymous with licensed sports games — NFL Madden, FIFA, NBA Live, UFC, and NHL. However, they have a glaring hole in the racing genre (only Need for Speed and Real Racing but no licensed racing). With the Codemaster acquisition, EA easily owns the best collection of racing IP. EA doesn’t dominate in every sport (MLB, PGA, NBA, WWE, etc.), but this acquisition adds an important piece. Plus, when it comes to something like EA Play, the company’s subscription service (which is also part of Xbox Game Pass), more racing games help strengthen the value proposition.

There’s also some reason to think that EA could create more value with Codemasters than Codemasters could do alone. For example, on the mobile front EA is slowly making progress. Although mobile currently only represents 9% of EA’s digital bookings — far below where it should be in time — the company is (hopefully) setting a better foundation for future mobile successes, especially when framed as extensions of various IP ecosystems. For example, EA has made strides with mobile versions of its sports franchises, and some of Codemasters’ racing games may be ripe for mobile expansions, too. We shall see.

Last but not least, esports. EA launched its Competitive Gaming division back in 2015, and the company now has global tournaments for Madden and FIFA. F1 is likely next. Codemasters partnered with F1 to launch the F1 Esports series competition in 2017, and the past couple years have seen impressive growth — F1 esports views grew 76% in 2019 to 5.8 million and hit a record-breaking 30 million views during the lockdown period this year. Esports is a negligible moneymaker for EA, but it provides strong advertising and partnering with the leagues themselves solidifies competitive advantages.

All in all, even though there’s some uncertainty about what EA could do with Codemasters, the licensed sports angle is a strong fit, Codemasters will immediately offer cash flow upside, and the acquisition still only uses up 20% of EA’s cash hoard. If EA manages the racing franchises well, then this acquisition could definitely be a winning play.