No GameStop buyout, no surprises


It’s over for GameStop Corp’s attempt. to sell out, and I can’t say I’m surprised.

On Tuesday, the video game retailer said it had halted efforts to find a buyer because financing was not available on terms buyers would find acceptable, sending shares down more than 27%. But why any potential buyer or lender would even want to approach this thing is beyond me.

After all, the gaming world is undergoing a rapid structural shift from physical copies of games to digital downloads and streaming.

This is one of the main reasons short sellers have been piling into the business for years.

It’s not that GameStop ignores changing dynamics. He has sought to diversify his business, such as with his collectibles store ThinkGeek. But the fact remains that the company is still deeply dependent on a category destined to sink into oblivion. Not only is GameStop’s video game division under siege from this change, but also its sizable pre-owned division, which makes big profit margins. As Bloomberg Intelligence analyst Matthew Kanterman points out, this take-back business is bound to have inventory problems as consumers move away from physical copies of games.

Meanwhile, other uncertainties hang over GameStop. The company has just sold its Spring Mobile division for $700 million (about Rs. 5,000 crores). This provides a welcome injection of cash, of course, but it sends mixed signals as to its overall strategy. By getting rid of this company, which operates AT&T wireless stores, didn’t it make itself even more dependent on the video game segment?

Additionally, the company experienced instability in its highest ranks. Michael Mauler was named CEO last February, to leave after just three months on the job. Since then, the retailer has been led by an interim chief executive. Mauler’s departure came shortly after the company terminated the employment of chief operating officer Tony Bartel and Mike Hogan, a senior executive overseeing strategic business and brand development.

Without a private deal, GameStop still has levers it can pull to become a healthier company. Executives could ax its bloated store portfolio, which wouldn’t be particularly difficult to do. Chief Financial Officer Robert Lloyd said in a call with analysts in November that the average remaining life of its video game stores was less than two years. These expirations provide easy exit ramps for underperforming stores. Additionally, potential innovation in consoles from Nintendo Co. and Sony Corp. could cause a jolt in sales and traffic at some point.

In a way, it’s a bit surprising that GameStop has lasted as long as it has in its current form. As early as November 2011, Bloomberg’s Tara Lachapelle was writing about speculation that GameStop was a ripe LBO opportunity, albeit targeted by shorts.

It leaves me both cringe at the fact that GameStop has been stuck in the same storyline for so long, and also oddly impressed that it’s been disjointed enough not to go the way of Blockbuster or Tower Records. It will be up to GameStop’s next CEO to somehow retain the courage but rewrite the company’s narrative.

© 2019 Bloomberg L.P.

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