Shares of Turnaround Letter Buy-rated GameStop (GME) fell by about 7% in trading on Thursday, July 11, the day after the company’s tender offer was closed. The company will repurchase 12 million shares, or about 11% of its outstanding shares, at $5.20.
It appears that a lot more than 12 million shares were tendered (possibly as many as 29 million), as only about 41% of the tendered shares will be repurchased by the company.
With that, and with the buyback price being set at the bottom of the range, investor confidence in the turnaround is dour. The anticipation of the auction, and its $5.20 floor, appears to have been propping up the stock price. It is also possible that arbitrage transactions were involved, which may have pushed the shares down today.
Fundamentally, we have almost no color on the plans being developed by the new CEO and new CFO, so we are in an information vacuum right now. However, the company still has as much as $475 million in cash remaining after the auction. Perhaps they should repurchase another 12 million shares, which would cost only $54 million yet would retire over 13% of the remaining shares.
Or, at that rate, they could repurchase all of the remaining shares using only cash on hand. This would still leave $25 million in cash on the balance sheet. GameStop produces more than enough cash flow to service its $470 million in debt. This bizarre math illustrates just how vilified GameStop shares are on Wall Street.
We continue to rate GME shares a BUY with a price target of $16.
Disclosure Note: One or more employees of the Publisher own GME shares.