Key insights
- The author argues that GameStop's potential acquisition of eBay, despite significant share dilution, could be accretive to earnings due to eBay's higher EBITDA and potential cost savings under Ryan Cohen's leadership. The analysis suggests a potential increase in per-share earning power for existing GME shareholders, especially if cost-cutting targets are met.
Most have heard of the deal and much confusion is swirling around the numbers so let’s break it down.
As we all now know it’s: Half Cash/Half Stock
Let’s focus on the half stock part of the deal. The cash is rather straightforward.
We will be rounding the numbers for understanding and also using conservative approximations.
Let’s assume GME issues shares to cover the $28 billion. Yes, that means about 1.2 billion new shares!
GME currently has 450 million shares. Therefore current GME shareholders will own about 25% of the combined entity.
Sounds dilutive, right?
But wait, let’s look at the numbers. We’ll be using EBITDA as a proxy to profit albeit we are aware of it’s limitations. However, it’s the cleanest comparable measure I can find (if anyone has suggestions otherwise I’m all ears!).
$EBAY $3 billion ttm EBITDA $GME $250 million ttm EBITDA
The combined entity can therefore be expected to produce $3.25 billion EBITDA. At a 25% share, this sounds lovely for GME shareholders, but alas, the debt.
We’ll conservatively estimate the interest on the debt post-deal to be about $2 billion
So $3.25 - $2 =$1.25 billion
$1.25 billion. This is the post-deal number that we are working with since debt is of course a factor.
25% of that is ~$312 million.
Therefore, original GME shareholders increase their per share earning power by 25% ($250 million before / $312 million after)
And remember, this is BEFORE any @ryancohen cost cutting magic.
Let that sink in.
Mr. Cohen assumes $2 billion in savings within year one.
Let’s put a margin of safety on that and assume $1 billion in savings.
That would increase original GME profit share to $562 million or a 125% increase from today (at $2 billion in savings that increase totally offsets the debt and GME shareholders see a 225% increase in profits per share!)
This is what accretive, not dilutive, equity issuance looks like. Learn from it corporate America.