On December 8 last year GameStop filed a prospectus with the SEC describing an “Open Market Sale Agreement” where it could sell up to $100 million of stock “at the market” which is essentially in the flow of normal trading activity. The stock’s close before the filing on December 7 was $16.35.
With the stock now trading more than 10 times the close on December 7 (it did fall initially this morning to a low of $164.81 but has recovered to around $183) the company updated the filing this morning so that it could now sell up to $1 billion in stock but no more than 3.5 million shares. This is a move that makes perfect sense as outlined in my article from early last week and the company wrote about in its 10-K filing on March 23.
These numbers show why it makes sense
During December last year GameStop’s stock essentially traded between $13 and $21. It closed the year at $18.84 with a market cap of $1.28 billion.
At last Thursday’s close (the market was closed on Friday) the stock was at $191.45 with a market cap of $13 billion, just over 10 times more than the end of last year even though nothing has materially changed in the business.
The company had $147 million in debt coming due this year and had paid off essentially half of it, $73.2 million, on March 15 using cash on hand. It had $508 million in un-restricted cash on January 30.
Of the remaining $73.5 million of debt, $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 credit expiring in November 2022.
It also has $216.4 million in debt coming due in March 2023, just two years away, that it is paying an interest rate of 10%. If it can pay this off early, as long as there aren’t any large pre-payment penalties, the company could save $21.6 million in interest costs or almost $0.31 in EPS. Note that GameStop paid $34 million in interest cost last year.
Dilution impact is minimal
The stock would have to trade just above $285 for the company to raise the maximum $1 billion on 3.5 million shares being sold, which the company views as unlikely. And even if it did the dilution impact would be minimal as GameStop has just over 70 million shares outstanding; 70,031,650 to be exact.
If the company wanted to raise enough money to pay off the $216.4 million of debt costing it 10% per year and not worry about having to refinance it, the dilution would hardly be noticed. Even if the shares come under pressure, but stay at $150 or higher, the dilution would be 2.1% or less.
- At $150: 1.44 million shares for 2.1% dilution
- At $160: 1.35 million shares for 1.9% dilution
- At $170: 1.27 million shares for 1.8% dilution
- At $180: 1.20 million shares for 1.7% dilution
For each $100 million in additional cash the company wants to raise the dilution could be under 1%.
- At $150: 667 thousand shares for 0.95% dilution
- At $160: 625 thousand shares for 0.89% dilution
- At $170: 588 thousand shares for 0.84% dilution
- At $180: 556 thousand shares for 0.79% dilution
What the money will be used for
Typical boilerplate for the “Use of Proceeds” which is, “We intend to use the net proceeds of this offering, if any, for working capital and general corporate purposes and to further strengthen our balance sheet, which may include funding our transformation initiatives and product category expansion efforts, the repayment, refinancing, redemption or repurchase of our existing indebtedness, and capital expenditures or the satisfaction of our tax withholding obligations upon the vesting of shares of restricted stock held by our executive officers and other employees.”