Electronic Arts to Buy Major Stake in Ubisoft

Electronic Arts Inc., the world’s largest video game publisher, announced a surprise deal Monday to purchase nearly 20% of French rival Ubisoft Entertainment, best known for its games based on Tom Clancy characters.

The purchase, which would make EA the largest shareholder of Ubisoft, fueled speculation that EA might be eyeing a bid for the entire company.

The deal came as a surprise to Ubisoft, based in Montreuil-sous-Bois in northern France.

“We did not hear about it until this morning,” said Ubisoft spokesman Martin Carrier. “Until we have further information about their intentions and agenda, we don’t know if this a hostile operation or what. We are waiting for the next step.”

Redwood City, Calif.-based Electronic Arts said it would purchase the shares -- amounting to 19.9% of Ubisoft stock -- from Talpa Beheer, the investment company controlled by Dutch billionaire John de Mol. The sale is subject to approval by U.S. antitrust regulators.

A price has been set, but neither party would disclose the amount. Industry sources said the investment was in the range of $85 million to $100 million, making it one EA’s largest acquisitions.

News of the deal drove Ubisoft shares up 25% to 21.16 Euros ($28.34) in Monday trading on the Paris stock exchange. Electronic Arts rose 30 cents to $59.94 on Nasdaq.

EA spokesman Jeff Brown said the purchase was, in part, a defensive move.

“We knew that someone was going to buy those shares at some point,” Brown said. “We thought it protected our options for the future if it was us.”

No decision has been made about buying additional Ubisoft shares, he said: “Right now our intention is to be a good shareholder in a company that is well run, with good management.”

But some analysts said they didn’t expect EA -- which earned $577 million on $3 billion in sales in its 2004 fiscal year -- to be satisfied with this minority stake.

“We believe that this move by EA is a step towards acquiring the entire Ubisoft and is a potential signal that EA may be willing to take similar aggressive moves to acquire other leading video game publishers,” Wedbush Morgan Securities analyst Michael Pachter said in a note.

EA Chief Financial Officer Warren Jenson indicated the company was preparing for the sale of Ubisoft.

“Let’s say that at some point Ubisoft were interested in merging with someone,” Jenson said. “This block of shares would be important in that context.”

Brown said EA was not daunted by the fact that Ubisoft lost 9 million euros, or $12.1 million, in its 2004 fiscal year ended in March, or that the losses have continued into 2005.

Still, EA could be looking at Ubisoft as a way to insulate itself from slowing sales at home, said P.J. McNealy, an analyst at American Technology Research in San Francisco.

“This could be nothing more than EA hedging its bets against slow sales,” he said. “If EA’s latest ‘Medal of Honor’ game is not doing well for some reason, one of the Tom Clancy games might be. But just what EA is up to is unsure at this point.”

Reuters was used in compiling this report.