8-KMaterial AgreementsFinancial EventsSecurities & Listing+2

ELECTRONIC ARTS INC. 8-K Report, Material Agreement (Jul 20, 2011)

Filed July 20, 2011For Securities:EA

Summary

Electronic Arts Inc. (EA) filed an 8-K on July 20, 2011, to report on the issuance of $632.5 million aggregate principal amount of 0.75% Convertible Senior Notes due 2016. This offering, priced on July 14, 2011, and including an over-allotment option exercised on July 15, 2011, represents a significant financing event for the company. The notes are convertible into EA's common stock at an initial conversion price of approximately $31.74 per share, representing a 35% premium to the closing price on July 14, 2011. To mitigate potential dilution from the convertible notes, EA entered into convertible note hedge transactions and warrant transactions. These agreements are designed to offset the dilutive impact of the shares underlying the notes, though the warrants themselves could have a dilutive effect if EA's stock price exceeds the strike price of $41.14.

Key Highlights

  • 1EA issued $632.5 million in aggregate principal amount of 0.75% Convertible Senior Notes due 2016.
  • 2The notes are convertible into EA common stock at an initial conversion price of approximately $31.74 per share.
  • 3The initial conversion price represents a 35% premium over EA's closing stock price on July 14, 2011 ($23.51).
  • 4EA entered into convertible note hedge transactions to reduce potential dilution from the notes.
  • 5EA also entered into warrant transactions with the same counterparties, which have a potential dilutive effect if EA's stock price rises above $41.14.
  • 6The net cost of the hedge and warrant transactions for EA was approximately $42.3 million.
  • 7The notes mature on July 15, 2016, and bear a low annual interest rate of 0.75%.

Frequently Asked Questions

The primary purpose was to report on the company's entry into material definitive agreements related to the issuance of $550 million (initially, $632.5 million including over-allotment) of 0.75% Convertible Senior Notes due 2016 and related hedging and warrant transactions.

EA raised $550 million initially, with an additional $82.5 million from the over-allotment option, totaling $632.5 million. The notes carry a low annual interest rate of 0.75%.

The notes are convertible into EA's common stock at an initial rate of 31.5075 shares per $1,000 principal amount, equating to an initial conversion price of approximately $31.74 per share. This conversion feature means that if EA's stock price rises significantly above this level, holders may convert their notes, which would result in the issuance of new shares, potentially diluting existing shareholders. EA has implemented hedge transactions to mitigate this dilution.

EA entered into privately negotiated convertible note hedge transactions to offset the potential dilution from the convertible notes if they are converted. Simultaneously, they entered into warrant transactions. These warrant transactions, while potentially dilutive if EA's stock price exceeds $41.14, helped offset the cost of the hedging strategy. The net cost for these combined transactions was approximately $42.3 million.