The online marketplace eBay on Tuesday rejected a proposal by GameStop to combine the two companies in a cash-and-stock deal worth about $55 billion, calling it “neither credible nor attractive.”
GameStop announced its proposal last week to combine with eBay, a company nearly four times its size. The offer has confounded much of Wall Street, in part over questions about how the company would afford it. GameStop’s chief executive, Ryan Cohen, initially declined to elaborate on how he would finance the deal and much of Wall Street remains skeptical about the mechanics of a deal.
“EBay has officially turned down its lopsided marriage proposal,” Don Bilson, head of event-driven research at Gordon Haskett, wrote in a research note. “This news should surprise no one since the odds it would accept Gamestop’s brash offer were infinitesimally remote.”
GameStop did not immediately return a request for comment.
In a letter to GameStop, eBay’s chairman, Paul Pressler, listed several concerns with the bid, following a review of the offer with legal and financial advisers. The concerns include uncertainty about how it would be paid for and the amount of debt the deal would add to the company.
A cornerstone of the deal was a letter that GameStop secured from the investment bank TD Bank, saying it was “highly confident” it would raise $20 billion to fund the offer. That letter, which is not binding, stated that the confidence rested partly on the assumption that the combined company would be investment-grade according to at least two of the three major credit ratings agencies.
Ebay does not believe the new company would be investment-grade, according to two people familiar with the deal who spoke on the condition of anonymity.
The ratings agency Moody’s has called the deal “credit-negative,” saying it would balloon eBay’s debt to $31 billion, from $7 billion. Mr. Cohen has said he would cut about $2 billion in costs and rapidly repay the company’s debt, but eBay has concerns about the impact of cost cuts on the company’s revenue.
Last week, Michael Burry, an investor and former hedge fund manager, announced that he had sold all of his GameStop stock because he was worried about the amount of debt required for a deal.
Mr. Cohen of GameStop has said that eBay shareholders would exchange about half of their shares for shares in the combined company, most likely providing them with majority ownership of the new entity. He has also said he might look for additional sources of equity to pay for the deal.
On Monday, GameStop said in a regulatory filing that it wanted to more than double the number of shares it was authorized to issue. That represents a potentially enormous amount of new stock that could fund, among other things, major acquisitions, while diluting GameStop investors’ holdings. In its letter to Mr. Cohen on Tuesday, eBay also raised concern about the extent to which “executive incentives” played a role in the offer. As part of a compensation package that GameStop established in January, Mr. Cohen is in line to be awarded billions of dollars in stock if the company surpasses certain thresholds for profits and market value.
Mr. Cohen has also said that he would be chief executive of the combined company. But the eBay board, which has dealt with several activist investors over the past several years, questions whether he would run the company better than current management. In the letter on Tuesday, Mr. Pressler stressed eBay’s improved performance as it has steered a turnaround to compete better with giants like Amazon. Shares of eBay are up about 55 percent over the past year, while shares of GameStop are down about 16 percent.
“We have sharpened our strategic focus, strengthened execution, enhanced our marketplace and seller experience, and consistently returned capital to shareholders,” Mr. Pressler wrote.
GameStop executives must now decide whether to raise their offer or try to persuade eBay’s shareholders directly, in what is known as a hostile bid. If such a bid were to get support from 20 percent of eBay shareholders, it could push for a special meeting to vote on the deal. That could be challenging given the skepticism that offer has faced so far: eBay’s stock is trading at about $107 a share, well below the $125 a share that GameStop has offered for the company.
Given their concerns about how a deal would work, “we believe it is quite possible eBay’s board rejects a sweetened offer unless the other issues are cleared,” analysts at Morgan Stanley wrote.
- Credits: The New York Times
- Author: Lauren Hirsch
- Photo: Justin Sullivan/Getty Images
