After dropping from $ 181.75, the close before the announcement, to $ 120.34 the next day, it immediately rebounded the next day to $ 183.75 wiping out all of its losses (even after dropping to $ 116.90) . And although it was very volatile on the third day, trading between $ 163.26 and $ 218.93, it closed at $ 181.
With the stock up 862% to $ 181.30 this year from $ 18.84, the high stock price offers management the opportunity to raise a significant amount of cash with very little dilution. It makes perfect sense for the company to sell shares.
$ 146.7 million in debt maturing this year
GameStop had $ 146.7 million in debt due this year as of Jan.30, but repaid half of it, or $ 73.2 million, on March 15 using available cash. He had $ 508 million in unrestricted cash on January 30.
Of the remaining $ 73.5 million, $ 48.6 million is owed to its French subsidiary, Micromania SAS, where it pays 0% interest. This debt can be extended until 2025 but the interest rate could increase. The remaining $ 25 million is revolving credits expiring in November 2022.
The interest rate on long-term debt is 10%
When a business is not doing well, it can end up paying a much higher interest rate than a healthy business. The bulk of GameStop’s long-term debt consists of $ 216.4 million, with 10% interest rate notes maturing in March 2023, in just two years. By paying that off early, as long as there aren’t any significant prepayment penalties, the company could save $ 21.6 million in interest charges or nearly $ 0.31 in EPS. Note that GameStop paid $ 34 million in interest charges last year.
Selling Stocks Can Barely Create Much Dilution
Shares of GameStop are up 862% year-to-date with them at $ 181.30. If the company wanted to raise enough money to pay off the $ 216.4 million in debt that costs it 10% a year and not worry about having to refinance it, the dilution would hardly be noticed. Assuming that the company would have to discount the shares to sell them, it would require the next number of shares and the resulting dilution.
- At $ 140: 1.55 million shares for a dilution of 2.2%
- At $ 150: 1.44 million shares for a dilution of 2.1%
- At $ 160: 1.35 million shares for a dilution of 1.9%
- At $ 170: 1.27 million shares for a 1.8% dilution
Selling stocks could put pressure on the stock. If it were to drop significantly, the dilution still would not be dramatic.
- At $ 100: 2.16 million shares for a dilution of 3.1%
- At $ 110: 1.97 million shares for a 2.8% dilution
- At $ 120: 1.80 million shares for a 2.6% dilution
- At $ 130: 1.66 million shares for a dilution of 2.4%
If the company wanted to raise $ 100 million in additional cash, it’s the number of shares it would have to sell and the dilution.
- At $ 100: 1 million shares for a dilution of 1.4%
- At $ 110: 909 thousand shares for a dilution of 1.3%
- At $ 120: 833 thousand shares for a dilution of 1.2%
- At $ 130: 769 thousand shares for a dilution of 1.1%
- At $ 140: 714 thousand shares for a dilution of 1.0%
- At $ 150: 667 thousand shares for a dilution of 1.0%
- At $ 160: 625 thousand shares for a dilution of 0.9%
- At $ 170: 588 thousand shares for a dilution of 0.8%
Because valuation numbers don’t make sense
Before Covid-19 derailed the US and global economies, GameStop was slowly losing revenue from fiscal year 2016 to 2018, then saw a sharp decline in fiscal year 2019 (ended January 2020). GameStop may be able to shake up its business enough to recover at least part of the recession, but that won’t happen overnight.
- Revenue for fiscal year 2016: $ 8.6 billion
- Fiscal 2017 revenue: $ 8.5 billion
- Fiscal 2018 revenue: $ 8.3 billion
- Fiscal 2019 revenue: $ 6.5 billion
- Fiscal 2020 revenue: $ 5.1 billion
- Revenue for fiscal year 2021: estimate of $ 5.43 billion
- Revenue for fiscal year 2022: estimate of $ 5.37 billion
Note that if GameStop’s fiscal year ended on January 30, 2021 and would normally be labeled Fiscal Year 2021, GameStop calls it Fiscal Year 2020.
When calculating the company’s valuation metrics, these results use $ 8.3 billion in fiscal 2018 revenue to be as generous as possible.
- At Monday’s close of $ 181.30
- Market capitalization of $ 12.3 billion
- 9.6 times higher than the December 31, 2020 market capitalization of $ 1.3 billion
- Market capitalization 1.5x compared to sales for the 2018 financial year
- vs 0.15x at December 31, 2020
Due to the huge rise in GameStop shares and the resulting bubble valuation measures, it makes perfect sense for the company to sell shares and build on a stronger financial footing.