Video game chain GameStop, which like many other retailers has fallen on some pretty harsh times in the age of digital distribution platforms and online sales, is considering a buyout from a private equity firm.
According to Reuters, people familiar with the matter told them GameStop has secured a financial adviser to help with buyout discussions as its stock price has continued to slide and its former CEO Michael Mauler departed for “personal reasons” in May:
Sycamore Partners is one of the private equity firms that has expressed interest in GameStop, one of the people said.
There is no guarantee the talks will result in GameStop deciding to sell itself, the people cautioned.
GameStop and Sycamore declined to comment.
…The retailer’s stock has slid more than 32 percent over the last 12 months, bringing its market capitalization to $1.42 billion, down from about $9.4 billion in 2007.
Tiger Management, a hedge fund that has been recently increasing its shares in GameStop, recently sent a letter to company management urging them to “launch a strategic review and revive shareholder confidence in the sustainability of the GameStop business model,” CNBC reported in May.
As Bloomberg noted, shares surged “as much as 13 percent to $15.78,” as a buyout means investors will be able to cash out their holdings. But it’s probably bad news for GameStop staff and many of the chain’s locations.
Private equity buyouts often involve loading the companies involved with debt, and usually precede radical restructuring of a company’s operations like layoffs or liquidating assets to help pay back the new creditors. In some cases, this means undercutting the company’s operations in the long term to produce a short-term profit bump that the private equity firm can use to flip the company for a profit. As Rolling Stone noted in 2012:
It takes several years before the impacts of this predatory activity – reduced customer service, inferior products – become fully apparent, but by that time the private equity firm has generally resold the business at a profit and moved on.
But it’s not clear that is the strategy here. As The Motley Fool noted, GameStop stock is cheap and the company is still profitable even in its decline, so any buyer could choose to simply squeeze every last dollar it can out of the chain before the next generation of consoles arrives and “the core business faces its reckoning.” Per CNBC, Sycamore Partners’ plan in its $6.9 billion purchase of struggling retailer (but growing business-to-business platform) Staples in 2017 involved splitting the retailer into three parts, a strategy which “allowed banks to finance the strongest parts of the business separately and give Sycamore the option to wind down its weakest unit—the retail business—at a later date.”