Will It Take a Proxy Fight to Finally Turn GameStop Around?

Retail

Published: March 14, 2019 11:45 am

Last Updated: January 30, 2020 11:25 pm

GameStop Corp. (NYSE: GME) faces more problems as investors threaten a proxy fight in a recent letter to the board of directors. A couple of activist firms are leading the charge, hoping the board will do something to combat the ongoing value destruction of this firm.

Looking at GameStop’s chart over the past four years, there’s no doubt why investors would be angry with the direction of this company, and why these activists now are calling for a refresh of the board and a tender offer of common stock.

Keep in mind this was a $47 stock in 2015, and since then it has tumbled to the current price level. The total market cap now is just over $1 billion.

Hestia Capital Partners and Permit Capital Enterprise Fund, which collectively own roughly 1.3% of the outstanding common stock of GameStop, sent the letter to the board. Overall, the letter expresses shared concerns of investors regarding the dramatic underperformance of the stock.

In the letter, the long-term stockholders — who are not typically activist investor s— called on the board to engage with them to address the ongoing value destruction by bringing in new and independent board members and tendering for up to $700 million of common stock. The proposed tender amount would represent about 61% of the shares outstanding.

Separately, Hestia and Permit believe that this underperformance in the stock is the result of a stale board of directors, which has an average tenure of 11 years. Additionally, these activists claim the board’s average stock ownership, despite directors’ average long-tenure, represents only three times the annual board fees, suggesting that the board is not well-aligned with stockholders.

Hestia and Permit have been shareholders of GameStop since 2012 and 2011, respectively. Additionally, GameStop represents the largest holding for both funds, due to their belief that the firm is dramatically undervalued and has significant upside potential.

Overall these firms believe a fair value for the stock is around $19 per share, an increase of roughly 70% from the most recent closing price.

Shares of GameStop were last seen down 1% at $11.05, in a 52-week range of $10.75 to $17.27. The consensus price target is $12.00.

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