GameStop GME shares fell 10% on Monday after the video game retailer announced plans to exchange $1.4 billion worth of convertible debt for equity, a move that will substantially reduce its long-term debt but dilute existing shareholders.
The company said certain noteholders would swap about $400 million of notes due in 2030 and $1 billion of notes due in 2032 for newly issued shares.
GameStop said it would not receive any cash proceeds from the transaction, as the exchange is being carried out directly with existing noteholders.
While the deal strengthens the company’s balance sheet by eliminating a significant portion of its debt, investors appeared more concerned about the increase in the company’s outstanding share count.
The issuance of new shares reduces the ownership percentage of existing investors, a factor that has weighed on GameStop’s stock during previous capital structure transactions.
Debt reduction comes without cash outflow
Convertible note offerings allow companies to raise capital at relatively low borrowing costs while giving investors the option to convert their debt into shares if the stock performs well.
Senior noteholders also receive repayment priority in the event of bankruptcy, making the securities less risky than common equity.Under the latest transaction, GameStop will eliminate $1.4 billion of long-term debt without using its cash reserves.
Once the exchange closes, expected on or around September 23, approximately $1.1 billion of notes due in 2030 and $1.7 billion of notes due in 2032 will remain outstanding.
The company acknowledged that the transaction could affect the trading price of both its shares and outstanding exchange notes.
“GameStop expects that some or all of the Existing Noteholders that participate in the Exchange may purchase or sell shares of Common Stock in open market transactions or enter into or unwind various derivative transactions with respect to Common Stock to hedge or unwind their investments in the Exchange Notes.”
“These activities could increase or decrease the market price of the Common Stock or the Exchange Notes, the effect of which may be material,” it said in a statement.
Analysts unlikely to welcome the move
Despite the improvement in leverage, the broader analyst community is expected to remain cautious.
Market participants have generally maintained a bearish outlook on the stock, with at least one research firm assigning a price target well below current trading levels.
The latest transaction is also likely to reinforce concerns that existing shareholders are bearing the cost of strengthening the company’s balance sheet through additional equity issuance.
For investors, the immediate impact of dilution appeared to outweigh the long-term benefit of lower debt obligations.
eBay pursuit continues
The debt exchange comes as GameStop presses ahead with its ambitious attempt to acquire e-commerce marketplace operator eBay.
The takeover effort began in May when Chief Executive Ryan Cohen approached eBay’s board with an unsolicited acquisition proposal reportedly valued at about $56 billion.
eBay rejected the proposal, describing it as “neither credible nor attractive.”
Most recently, CNBC reported that Cohen agreed to forgo a compensation package worth up to $35 billion as he focused on advancing the proposed acquisition.
Last month, GameStop disclosed in a regulatory filing that it had increased its ownership in eBay to 43.4 million shares, representing approximately 9.8% of the company.
The expanded stake signaled that GameStop intends to continue pursuing the transaction despite eBay’s rejection of its initial offer.
Monday’s debt restructuring therefore represents another step in GameStop’s broader effort to reshape its balance sheet while pursuing one of the retail sector’s most closely watched takeover attempts.
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