Gamestop is looking at options after boss Cohen bid for eBay. (Photo by Michael M. Santiago/Getty Images)
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GameStop boss Ryan Cohen’s audacious near $56 billion attempt to take over eBay may have started as one of the most audacious takeover bids in retail but it is increasingly looking like something different.
It is now morphing into a potential partnership that could allow GameStop to turn its 1,600-store U.S. footprint into a physical infrastructure network for eBay, while giving the videogame retailer a stronger position in the collectibles market, which is rapidly becoming the center of its own business.
Its latest results show that GameStop has moved beyond being a struggling videogame retailer or infamous meme stock and instead is looking for a new growth story, while Cohen has simultaneously built a stake worth almost $5 billion in eBay.
While GameStop’s fiscal second-quarter revenue fell 19% to $790.2 million from $972.2 million a year earlier, collectibles revenue jumped 57% to $356.3 million, or 45.1% of total sales. That compares with 23% a year earlier, while videogames now account for just a third of sales.
GameStop has been building its collectibles operation around trading cards, Pokémon, toys, apparel and other pop-culture merchandise, plus authentication and grading services. It has also launched Power Packs, allowing customers to buy digital packs that unlock real, PSA-graded trading cards held in the PSA Vault, with cards available to be shipped, sold or retained digitally.
GameStop And eBay Could Partner
Meantime eBay has one of the world’s largest marketplaces for exactly the kind of products GameStop is increasingly focused on and that is starting to make the proposed combination seem slightly less random.
To recap, in May GameStop formally proposed paying $125 a share for eBay in a transaction valued at approximately $55.5 billion, split equally between cash and GameStop shares, with GameStop saying the cash component would be funded from its balance sheet and up to $20 billion of third-party acquisition financing.
Cohen argued that the combined company could compete more effectively with Amazon, while GameStop’s stores could provide eBay with a physical network. But eBay’s board rejected the proposal, dubbing the offer “neither credible nor attractive.”
The board also cited concerns over financing, leverage, operational risks, leadership and the long-term implications for eBay’s growth and profitability.
But that rejection has not stopped Cohen and GameStop subsequently increased its exposure to eBay dramatically. By August 1, it held about 43.4 million eBay shares, worth approximately $4.95 billion, equivalent to roughly 9.8% of the company, making it one of eBay’s largest shareholders.
Cohen himself acknowledged in a June interview that a partnership could involve eBay using GameStop stores to verify rare collectibles. For eBay GameStop’s stores could provide touchpoints in a business that has historically been almost entirely digital, while for GameStop, eBay could provide access to a much larger marketplace and buyer base.
Risks Over Growth Models
Morningstar, in its analysis of the original proposal, argued that GameStop’s interest was understandable because its traditional physical videogame business faced structural decline and eBay offers a cash-generative marketplace.
But it also warned that eBay’s recent growth had been supported by increased investment in technology and marketing, raising the question of whether cutting expenses, as GameStop proposed, could undermine that growth. Morningstar’s fair value estimate for eBay was $67, far below GameStop’s proposed $125 a share and its current stock value.
GameStop’s original proposal claimed it could eliminate $2 billion of annual costs from eBay within a year, including $1.2 billion from sales and marketing, $300 million from product development and $500 million from corporate costs.
Marketplace eBay has achieved growth and rebuffed Cohen’s bid. (Photo by Justin Sullivan/Getty Images)
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For its part, eBay is now producing growth without GameStop and its second-quarter gross merchandise volume rose 15% to $22.4 billion, while revenue reached $3.13 billion. Management subsequently forecast third-quarter revenue of $3.07 billion to $3.12 billion, above Wall Street expectations.
There are now essentially three credible paths ahead. The first is that Cohen keeps pursuing eBay, with his near-10% stake giving him considerable economic exposure and a platform from which to engage with other shareholders.
The second is a partnership, which may now be the most strategically logical route. GameStop can monetize its stores without acquiring eBay, while eBay can access physical authentication and fulfilment capabilities without taking on GameStop’s operating risks.
The third is simply that GameStop remains an eBay shareholder while continuing to build its own collectibles business.
Cohen has already demonstrated that he is prepared to think very big. Some would say, too big. But the latest operating figures suggest GameStop may not need to own eBay to benefit from what it offers.
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