UPDATE 2-EA buys game studios for $855 million

(Adds outlook, analyst comment, share price, background)

SAN FRANCISCO, Oct 11 (Reuters) - Electronic Arts Inc ERTS.O said on Thursday it will buy two video game studios for $855 million in a deal that fills weak spots in its games lineup by adding role-playing and action titles.

The world’s biggest games publisher, which produces popular titles such as “Madden” football and “The Sims,” also said it would exceed its earlier profit and revenue forecasts for the quarter ended in September.

Under the deal, EA will acquire BioWare Corp and Pandemic Studios, privately held companies that have been partners since a 2005 deal brought them together under VG Holding Group with backing from private equity firm Elevation Partners.

EA shares rose as much as 2.2 percent to $60 in extended trading before falling near to its regular Nasdaq close of $58.69.

“You can argue they may have overpaid a little bit. It is going to be a little dilutive, but EA is sitting on $3 billion in cash and it been looking for ways to put it to work,” said Todd Greenwald of Nollenberger Capital Partners.

“They need content and growth and this provides that.”

EA said the deal would be dilutive to its fiscal 2008 earnings by 30 cents to 40 cents per share. Excluding special charges, the purchase would reduce EA’s earnings by about 5 cents a share in its fiscal fourth quarter, which concludes at the end of March.

It could also boost EA’s revenue by more than $300 million a year, Chief Financial Officer Warren Jenson told Reuters in an interview.

“We’re very excited about the revenue potential. We see that in both ‘09 and ‘10 to be in excess of $300 million,” Jenson said.

EA had just over $3 billion in revenue in 2007.

EA plans to release four or five games a year from the studios in each of the 2009-2011 fiscal years.

EA said it will pay $655 million in cash and $150 million in equity incentives tied to performance. It will also assume $50 million in stock options issued by VG Holdings.

One beneficiary may be EA Chief Executive John Riccitiello, who rejoined EA earlier this year from Elevation, where he ran VG Holdings.

Riccitiello said the acquisition would likely result in a personal benefit for him down the road, but added the deal was drawn up by a separate group set up by EA’s board to ensure independence.

Elevation's investment team also includes U2 singer Bono and Fred Anderson, a former chief financial officer for Apple Inc AAPL.O, who settled with securities regulators earlier this year over allegations involving stock options backdating.

BioWare is the maker of a series of critically acclaimed and best-selling role-playing games, including "Star Wars: Knights of the Old Republic" and the "Baldur's Gate" series. Its highly anticipated science fiction game "Mass Effect" is being published next month by Microsoft Corp MSFT.O.

Pandemic makes military-style action and shooting games such as "Mercenaries," "Star Wars Battlefront" and "Full Spectrum Warrior." It is currently working on "Destroy All Humans 2" for publisher THQ Inc THQI.O.

“The reason we did this deal is because it’s an incredible strategic fit with EA and there is an unbelievable collection of talent from BioWare and Pandemic,” Frank Gibeau, head of EA Games, said in an interview.

“It also puts us in categories that we’re not in right now.”