BREAKINGVIEWS-GameStop's meme bid for eBay appraises poorly

By Robert Cyran

NEW YORK, May 4 (Reuters Breakingviews) - Good memes are fun for a while, but they get old. GameStop GME.N, the original social-media-hyped stock, is trying to breathe fresh life into its faded viral status and video-game retailing business with an audacious plan to buy far larger online auction site eBay EBAY.O. The $56 billion proposal looks as nonsensical as its share price.

Like all things GameStop since it became a retail investing frenzy in 2021, the deal will attract attention. Making sense of it is another story. GameStop’s market capitalization was a little more than $11 billion on Monday morning. It plans to borrow nearly twice as much to fund the unsolicited bid.

GameStop, led by Ryan Cohen, says it essentially lined up TD Securities to provide $20 billion, which would supplement $9 billion of cash and equivalents it already holds. For such a chunky takeover, the debt terms will presumably be stiff.

The stock portion raises similarly worrisome questions. GameStop’s revenue peaked more than a decade ago. It's now profitable, but slashing costs at eBay -- the core of the strategy -- will only go so far. Electronics vendor Best Buy BBY.N is valued at about 30% of trailing revenue. On that basis, GameStop would be worth $1 billion. After adjusting for its net cash and liquid assets, however, it's valued at $6.5 billion.

Maybe that reflects a brave new world of stock trading. Even then, the $125-a-share acquisition offer includes only $75 in cash, a discount to where eBay was trading in February, when GameStop started accumulating a 5% stake.

The suggested benefits of merging brick and mortar with bits and bytes are shaky. GameStop intends to hack $2 billion in costs out of eBay. Taxed and capitalized, they might be worth some $16 billion now. There's nothing synergistic about it, however, and eBay boss Jamie Iannone could buy storefronts and cut expenses on his own just as easily. Moreover, the dramatic sales and marketing savings GameStop envisions would probably hurt eBay's longterm prospects.

There’s also little compelling reason for eBay shareholders to entrust Cohen with their company, whose total return over the past decade has outpaced the S&P 500 Index .SPX without any obvious speculative online support. GameStop's CEO is incentivized for expansion: he’s eligible to receive up to 172 million shares, worth more than $4 billion today, if his company’s market value and EBITDA reach certain thresholds, albeit with some adjustment for stock-based deals. The bid is big, but the appraisal comes in low.

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CONTEXT NEWS

GameStop said on May 3 it had made an unsolicited and non-binding proposal to buy online marketplace operator eBay for about $56 billion, or $125 a share. The cash-and-stock bid represents a 46% premium to eBay's closing price on February 4, when GameStop started accumulating a 5% stake.

Under the terms of the offer, GameStop said it expects to fund the cash portion with its own holdings and third-party financing, with a letter from TD Securities indicating it would provide as much as $20 billion.

GameStop said it plans to slash $2 billion of annualized eBay costs, more than half of which would be from sales and marketing, within 12 months of closing the deal.