Video game publisher Electronic Arts (NASDAQ:ERTS) said Tuesday it agreed to buy PopCap Games for as much as $1.3 billion in cash and stock to boost its digital gaming business.

The latest move from Electronic Arts (EA) makes sense as it needs to find newer forms of delivering games due to declining sales of traditional retail gaming business amid higher production costs and soaring popularity of digital games.

Seattle-based PopCap, founded in 2000 by John Vechey, Brian Fiete and Jason Kapalka, makes games for Facebook, smartphones and tablets where more people will likely play games in the future.

With annual revenue approaching $4 billion in 2010, the casual games sector is growing faster than the video games industry as a whole.

The takeout of PopCap gives EA several award-winning blockbuster digital games such as Plants vs. Zombies, Peggle, Bejeweled and Zuma. EA also has some critically acclaimed franchises such as The Sims, Madden NFL, FIFA Soccer, Need for Speed, and Mass Effect.

PopCap's games, which have been downloaded over 1.5 billion times by consumers worldwide, are being played on various platforms such as Facebook, RenRen, Google, iPhone, iPad and Android.

Most of Popcap's games can be played free in a limited form, with the full version available for a fee.

PoCap's Plants vs. Zombies for iPhone had the best iPhone product launch in history - selling over 300,000 units in the first 10 days and its flagship franchise, Bejeweled, has sold more than 50 million units.

No wonder, about 80 percent of PopCap's revenue in calendar year 2010 came from high growth digital platforms. Analysts expect PopCap to generate revenue in excess of $120 million in 2011, up from $100 million in 2010.

PopCap has a proven financial trajectory with sustained revenue growth and double-digit operating margins, said EA CFO Eric Brown in a statement.

Here are some statistics about PopCap games:

* Number of PopCap game downloads since 2000 (1.5 billion+)

* Number of Bejeweled units sold since 2001 (50 million+)

* Number of hours consumed playing PopCap games online each year (1.1 billion)

* Number of hours consumed playing PopCap games across all platforms each year (3 billion)

* Number of mobile phones on which Bejeweled has been deployed since 2004 (150 million)

EA and PopCap are a compelling combination, said EA CEO John Riccitiello. PopCap's great studio talent and powerful IP add to EA's momentum and accelerate our drive towards a $1 billion digital business.

Digital revenue accounted for more than $750 million in EA's fiscal 2011 revenue of $3.6 billion.

Meanwhile, EA's global studio and publishing network will help PopCap rapidly expand their business to more digital devices, more countries, and more channels.

Terms of Deal

EA will pay PopCap $650 million in cash and another $100 million in stock. In addition, PopCap can earn up to $550 million in additional bonuses in the next two years based on the performance of its games.

As a result, EA may be paying up to $1.3 billion for PopCap. As of March 2011, EA has cash and cash equivalents of about $1.6 billion.

EA, which develops its games for PCs, console systems, and portable devices ranging from Sony, Nintendo, and Microsoft, would also provide up to $50 million in long-term equity retention awards to PopCap employees over the next four years.

EA also publishes games based on Hollywood franchises such as The Lord of the Rings and Harry Potter.

Redwood City, California-based EA got $550 million in commitments from firms including Morgan Stanley, J.P. Morgan and UBS Securities to finance the deal. EA would also explore permanent financing options in connection with the funding of this acquisition.

The deal, which is expected to close in August 2011, subject to customary closing conditions, would add at least 10 cents to EA's non-GAAP earnings in fiscal 2013.

In addition, the $600 million share repurchase program that EA announced in February, 2011 remains in effect.

Social Acquisitions by EA

EA, whose roots are in PC and console gaming, has been recently focusing more on causal gaming space and spent millions buying several firms, which sell games through Facebook, iTunes and Xbox Live.

In May 2011, EA acquired Firemint, a developer of smartphone games such as Flight Control and Real Racing. Terms of the deal were not disclosed.

In November 2009, EA paid $275 million for Playfish, which develops social games for Facebook. In October 2010, EA announced the acquisition of UK-based iPhone and iPad games publisher Chillingo for $20 million in cash.

EA was once criticized for the acquisition of 19.9 percent of shares of its competitor Ubisoft, a move that many felt would lead to a hostile takeover but has not yet materialized.

The company was also in the news for its attempted hostile takeover of Take Two Interactive (NASDAQ:TTWO).

Guidance Raised

Meanwhile, EA boosted its financial forecast for the first quarter and fiscal 2012.

The company increased its first-quarter GAAP net revenue forecast to about $975 million to $1.00 billion from $910 million to $950 million.

Earnings are now expected to range from 63 cents a share to 66 cents a share, up from previous guidance of 44 cents a share to 53 cents a share.

EA projects non-GAAP net revenue of approximately $500 million to $525 million, higher than prior guidance of $460 million to $500 million.  Non-GAAP basis excludes $475 million in deferred net revenue.

On a non-GAAP basis, the company now expects a narrower loss for the first quarter in the range of 37 cents a share to 40 cents a share, compared to its earlier outlook of a loss of 44 cents a share to 49 cents a share.

Wall Street expects a loss of 45 cents a share on revenue of $490.14 million, according to analysts polled by Thomson Reuters.

For fiscal 2012, EA said it expects results to range between a loss of 4 cents per share and profit of 26 cents per share, compared to previous guidance of break-even and 28 cents per share.

GAAP net revenue is expected to be approximately $3.725 billion to $3.95 billion, higher than prior forecast of $3.7 billion to $3.9 billion.

The company reaffirmed its non-GAAP earnings outlook of about 70 cents a share to 90 cents a share.

EA raised its non-GAAP revenue outlook to about $3.8 billion to $4.025 billion from previous guidance of $3.75 billion to $3.95 billion.

Analysts expect earnings of 85 cents a share on revenue of $3.90 billion for fiscal 2012.

Shares of EA closed Tuesday's regular trading session at $24.17 on Nasdaq. The shares fell 3 percent in after-hours trading, as investors appeared to be concerned over the high-end of the price range under the deal.