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GameStop Buyout? Not Likely
Posted by: Todd Sullivan (IP Logged)
Date: August 13, 2012 11:16AM
Saw this (below) in Barron’s over the weekend and felt compelled to address it:
Quote:Let that sink in. “How they get their content.” I think maybe we could start by asking them where they get their movies from? Blockbuster? Hollywood Video? Any other of a dozen video stores that no longer exist in their neighborhoods? Maybe we could just as easily ask when/where the last time they bought a CD was? Tower Records? The easy answer is both are virtually exclusively downloaded. As I have said before, I agree not all content is going to download. It is just that the physical content delivery of just video games isn’t a $2.4 billion business.
It does appear that GME know this, despite what Mr. Pachter may think, as they have moved themselves into the download/online game space and are diversifying away from physical delivery of games in trying to become a second hand seller of used “refurbished” AAPL products.
More from the article:
Quote:Now, we have to admit there is a large difference in the BBY founder not wanting his 20% stake, valued as approximately $1.4 billion, to evaporate. So yes, he made an offer to buy. At GME, insiders as a group own 1.2% of the outstanding shares, and no one individual owns more than 0.3%. The math there is more than a little different. In addition, the very people who would take a large stake in the company are the very people referenced in the beginning who are short it. Where is a buyer coming from?
Quote:Really? Same store sales fell 12% in the first quarter and are forecast to fall 5% for the full year (I will say right now they will fall more than that). We should also note that in March the company said same store sales would be up for the year then only two months later admitted they would be down. So yes, while it is “popular,” it is becoming less so. While the company “expects” year-over-year profits to increase, YTD they are in fact down despite the prodigious buybacks mentioned below. And based on current sales trends, it will take a very large percentage of the cash they hold (also mentioned below) to manufacture earnings anywhere near last year.
That scenario, (using large amounts of cash to meet EPS targets) eliminates the dividend increase (mentioned below) as cash will begin to be drained (which already happened year over year in the first quarter). While it may work for this year, it leaves a massive hole for next year.
Quote:Industry sales are down 20% to 30% yet GME maintains its annual guidance despite missing their estimates for the first quarter? How? Yes EA gets 60% of its sales from physical games, but that percentage is shrinking. In Fact:
Quote:Since Barron’s quoted Mr. Moore, we should note what he said just this weekend:
Quote:As Barron’s should and does know, it isn't the current numbers that matter but the direction they are going in. For GME, they are headed in the wrong direction both on a company level and on a industry level for what they do. GME simply has far too many locations as the switch to digital comes about. As they close stores they also lose out on their most lucrative business, selling used games. Fewer store mean fewer console sales, etc.
Quote:Bottom line? Why would someone, without significant skin still in the game like the BBY founder, pay a near 50% premium for the company? There was value in Blockbuster, Circuit City, Hollywood Video, etc., before they all went under. While again, I am not saying GME is going extinct, I do think if it does survive (as they probably will for now since the balance sheet is still okay, unless they ruin it in a effort to prop up EPS/dividends), it will do so at a fraction of its current size. Every trend in the business GME operates in is moving away from the physical store model.
Any buyer would have to do just that: shrink the store base dramatically and focus on digital. That would cost a pretty penny and I doubt, because of that, the premium that is being bantered about is possible.
GameStop Buyout Not Likely
Posted by: Adib Motiwala (IP Logged)
Date: August 13, 2012 01:06PM
Interesting points. One thing to consider is that the console cycles are much longer than in the past 7-8 years already? So the sales of consoles are down significantly. This would be the primary reason for SSS to be down. I am more interesting in seeing how Cash flows hold up over the next 3 quarters of this financial year. Margins may actually improve as hardware sales are low margin. If Gamestop can keep the used game business going till the new consoles arrive, then it would be fine. However, if the used game business also suffers then I would totally agree that GME is not worth its current market cap.
Their leases are shorter in duration and about 25% odd come for renewal every year.
Re: GameStop Buyout? Not Likely
Posted by: adamcz (IP Logged)
Date: August 14, 2012 06:58AM
I might consider buying GameStop at 5x if they were to announce that they will operate as a liquidation for 10 years, focusing on dividend payments, closing 5-10% of stores each year as leases expire, and allowing only minimal investment in capex.
If they think their business model will exist in 10 years (or even 5 years?), I wouldn't trust them with my money.
GameStop Buyout Not Likely
Posted by: SapientInvestor (IP Logged)
Date: August 15, 2012 12:14AM
There is no good reason to have a store dedicated to selling video games as there was in the past and the often discussed digital distribution is only part of the story but certainly the inevitable nail in the coffin. This is most likely a value trap. The only unlikely ways it wouldnt be is if they do as Adamcz says or who knows, someone may offer to buyout the company to "turn it around." People have done dumber things. I dont know the timing of the demise but if I had to do something I would short it. However, there are better ideas out there.