GameStop launches a $56 billion bid for eBay - but the math isn't working out

By Christine Ji

While eBay shares are rising, Wall Street is questioning the financial engineering that would be required for GameStop to acquire a company nearly three times its size.

GameStop plans to fund a proposed acquisition of eBay through a combination of debt and equity.

GameStop has puzzled the market with its ambitious bid to reinvent its business by acquiring eBay for $55.5 billion.

Shares of eBay (EBAY) are up 5% in afternoon trading Monday, while shares of GameStop (GME) are down 10%. While the prospect of a buyout deal has sent eBay shares higher, Wall Street analysts are voicing skepticism about the feasibility of GameStop's proposed transaction.

"We give the deal a relatively low probability of success," Baird analyst Colin Sebastian wrote in a Monday note.

GameStop, with an $11.9 billion market capitalization, is aiming to buy eBay, a company valued at $46.2 billion, through a mix of 50% stock and 50% cash. GameStop CEO Ryan Cohen told the Wall Street Journal that he's willing to pursue a proxy fight and take his offer directly to eBay shareholders if the board refuses.

In a Monday press release, eBay shared that the company would review and consider the unsolicited acquisition proposal from GameStop. "EBay shareholders are advised to take no action at this time," the company wrote.

Under the proposed deal, Cohen would become CEO of a combined company that uses GameStop's physical stores as hubs for eBay's authentication and fulfillment services. GameStop has built up a 5% stake in eBay since Feb. 4 and is offering to buy eBay at $125 per share, according to a press release.

Read: GameStop is hungry for relevance. Is buying eBay the answer?

Sebastian estimates that the deal would require GameStop to issue over 1 billion new shares, as the company only has around $9 billion in cash and securities on its balance sheet. That would result in significant dilution for GameStop shareholders, who would only have around 25% to 30% ownership in the combined entity, according to Sebastian.

GameStop is likely considering the possibility of the combined entity trading at a "meme multiple," Sebastian added, meaning that the company could see valuation expansion from hype and retail-investor enthusiasm instead of fundamentals.

Bill Smead, CIO and portfolio manager of Smead Capital, believes GameStop's proposal is symptomatic of excessive mania in the stock market. "I don't think they're going to be able to pull this off," Smead told MarketWatch. He's also concerned that GameStop's proposal could open eBay up to be acquired by other buyers.

Smead Capital is the sixth largest active owner of eBay among mutual funds and has been a shareholder since 2008. "The last time meme trades were happening, we reduced ownership of anything growth related," Smead added.

The strategic rationale for the deal is "not clear," Bernstein analyst Nikhil Devnani wrote in a note Friday following a report saying that GameStop was soon to announce a deal. While GameStop and eBay have overlapping business segments in games, toys and collectibles, Devnani pointed out that eBay is a far bigger and more diversified business. "We're not clear on what [GameStop] would bring to the table strategically that would further enhance [eBay]'s offerings," Devnani said.

EBay shareholders are unlikely to accept the deal, Devnani added. The online-auction company is already in the middle of a turnaround, and shares have risen 52% in the past year. The company has pivoted its strategy to focus on high-value verticals within refurbished goods. Earlier this year, eBay announced the acquisition of fashion-resale site Depop. Debt from a potential acquisition could reduce eBay's standalone free cash flow, Devnani said.

"Why disrupt things? The turnaround is working," Devnani wrote.

-Christine Ji

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05-04-26 1532ET