GameStop to dilute by a factor of 2.5

After a week, the retail chain GameStop is letting the cat out of the bag: The planned eBay takeover is indeed accompanied by an extreme dilution of GameStop stock. According to a filing with the US stock exchange regulator, the company wants to increase the maximum number of authorized shares from one billion to 2.5 billion. To achieve this, the company needs majority approval from investors, which GameStop plans to seek at the annual general meeting on June 12.

The dilution shows how unbalanced the intended takeover is. After today's crash of its stock, GameStop is no longer worth ten billion US dollars. eBay, on the other hand, has a market capitalization of almost 48 billion US dollars. The takeover would cost GameStop 56 billion US dollars, plus the assumption of around 3.4 billion US dollars in debt.

GameStop plans to finance half of the costs through a stock package: eBay investors are to receive GameStop shares worth 28 billion US dollars. This sum refers to the value before the merger of the two companies, should the deal go through.

High Risks

Since a near-term stock price explosion for GameStop stock is unrealistic, the company wants to make up the difference through new shares. The clever part: By issuing shares to eBay investors, GameStop does not have to sell the new shares on the stock market to inflate its market capitalization.

However, the undertaking only works if existing GameStop investors do not sell their shares en masse out of fear of dilution. With the creation of up to 1.5 billion new shares plus the issuance of other previously authorized securities, the existing stake in the company will at least decrease. After the takeover, the new combined company would be majority-owned by the existing eBay investors but would be under GameStop's leadership.

GameStop has actually issued just under 449 million shares so far. Almost 269 million additional shares are reserved, among other things, for a “CEO Performance Award” and as purchase options for former investors. The rest is open.

Is the GameStop CEO pursuing personal interests?

The CEO Performance Award is currently under criticism because it could be a causal driver for the eBay takeover. Cohen receives no compensation other than performance-based stock packages that are measured by market capitalization and business results.

The complete package includes options on almost 172 million shares at a purchase price of $20.66 each. Cohen can exercise the first ten percent when GameStop is worth $20 billion and has accumulated EBITDA of two billion US dollars. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The accumulation can take place over several quarters.

After the first tranche, the market capitalization must increase in increments of 10 billion US dollars, and the EBITDA result in increments of one billion US dollars for further exercise.

With the eBay takeover, Cohen would catapult the market capitalization to over 50 billion US dollars at a stroke. eBay does not provide EBITDA results; however, its profit before tax recently approached one billion US dollars. Thus, after less than two years, Cohen would have already achieved half of his performance goals. Potential multi-billion dollar gains await him.

(mma)