RC Ventures reaches agreement with Gamestop Corp (GME)

M.Cap: $1.4 billion | GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer. 

RC Ventures

On September 21, 2020, RC Ventures (9.8%) stated that it had conversations and communications with senior management and several members of the Board concerning its views of the company. During these conversations, RC Ventures expressed its willingness to become more involved in the company under certain circumstances that it believes are likely to produce the best results for all shareholders. Source

On November 16, 2020, RC Ventures (9.98%) sent a letter to the Board expressing its views on the performance of the company and urging them to conduct a strategic review of the business and to share those findings with stockholders. It stated that, " Taking the right steps in 2020 and 2021 can enable GameStop to own a bigger share of the market when estimated industry sales explode to more than $200 billion per year in 2023".

On December 21, 2020, RC Ventures (12.9%) stated that it has engaged, and intend to continue to engage, in discussions with the Board regarding means to drive stockholder value, including through changes to the composition of the Board and other corporate governance enhancements.

On January 10, 2021, RC Ventures (12.9%) entered into an Agreement with the company. Pursuant to the Agreement, the company increased the size of the Board from ten to thirteen members and appointed Alan Attal, Ryan Cohen and Jim Grube (the “New Directors”) as directors with terms expiring at the 2021 annual meeting of stockholders, whereat the size of the Board will be reduced by four members and the New Directors will be nominated for re-election alongside incumbent directors Paul Evans, Reginald Fils-Aimé, George Sherman, William Simon, Carrie Teffner and Kurt Wolf.

Scion Asset Management

On April 10, 2020, Scion Asset Management disclosed 5.3% and revealed that on July 28, 2019, it has sent a letter (refer, "Exhibit C") to the Board noting its concerns regarding the company’s capital management. In its letter, it recommended that the Board use its excess cash to complete the $300 million share buyback authorized by the Board, invest in the business and pay down debt, and not on projects of uncertain return, such as costly store renovations or business acquisitions.  On August 16, 2019, Scion Asset Management sent the Board another letter (refer, "Exhibit D") in which it reiterated its recommendations. On August 26, 2019, Scion Asset Management sent the Board a third letter (refer, "Exhibit E") in which it (i) again raised its recommendation, (ii) proposed a reduction in compensation for non-executive Board members; (iii) expressed concerns about the 6.5 million Share 2019 Incentive Plan, and encouraged Board members and executives to instead buy shares in the open market; and (iv) recommended the resignation of four non-executive members and one executive member from the Board and the addition of a non-executive member with video-game industry experience. Notably, on March 9, 2020, the company announced changes to its Board’s composition, including the resignation of four Board members and the appointment of three replacement Board members. In its April 10, 2020 13D, Scion Asset Management stated that it has continued to engage in communications with shareholders, management and the Board and recommended the company use its cash to buy back shares and pursue debt reduction and buybacks, and that Board members and executives buy shares in the open market. It has also raised concerns with the company about its consulting costs and recommended that the company: (i) engage in a sale and leaseback of its properties (including distribution, warehouse and corporate office and headquarter facilities), given the current low interest rates; (ii) continue to not pay dividends; (iii) consider ways to cut costs, such as by selling the Company airplane and eliminating consultants; and (iv) consider improving or finding a buyer for their Game Informer Magazine. Source

On May 6, 2020, Scion Asset Management reduced its stake to 4.3%.

Hestia Capital Partners and Permit Capital Enterprise Fund

On March 14, 2019, Hestia Capital Partners and Permit Capital Enterprise Fund (together hold 1.3%) sent a letter to the Board expressing their shared concerns regarding the dramatic underperformance of the Company’s stock. In the letter, they called on the Board to engage with them to address the Company’s ongoing value destruction by bringing in new and independent Board members and tendering for up to $700 million of the Company’s common stock. Also, they stated their belief that hiring a highly qualified CEO is of utmost importance. Source

Valuation Insight

Applying the lowest EV/EBITDA ratio in the peer group of 2.9x (Bed Bath and Beyond) implies that GameStop’s value per share is $19 based on our pro forma estimate of the Company’s fiscal 2018 EBITDA. Applying the average EV/EBITDA valuation for the peer group yields a $40 per share implied valuation. Applying a price to earnings ratio to the Company based on the low (Bed Bath and Beyond) and average value for the peer group yields similar implied values.

Assumptions: A slow decline in baseline FCF through 2020 followed by an uptick starting in 2021 due to the assumed 2020 release of the PS5, incremental benefits from SG&A cuts starting at $12.5M (post-tax) in 2019 and growing to $50M per year by 2021, a share price multiple which begins at 5.75x FCF and slowly expands to 6.5x, the retirement of 2019 debt, and a refinancing of the 2021 debt.

This simple analysis suggests such a repurchase plan might result in an increase in the share price to $39 by 2022 – 3.5x current levels and almost double our $22 estimate of fair value. We believe cost savings could significantly exceed our modeled amount, and the multiple expansion could be higher than modeled, as investors see improving FCF generation and responsible capital allocation from the Company.

On March 28, 2019, Hestia Capital Partners and Permit Capital Enterprise Fund issued a press release announcing the nomination of four candidates for election to the Board at the upcoming 2019 annual meeting of shareholders.

On April 1, 2019, the company entered into a cooperation agreement with Permit Capital and Hestia Capital Partners and pursuant to it, the Company will appoint an independent director from among the candidates nominated by Hestia and Permit. As part of the Board’s ongoing refreshment and search efforts, the Board will appoint an additional independent director who will be selected by the Board in consultation with Hestia and Permit. It is anticipated that the two new directors will join the Board on or before April 30, 2019.. Source

On December 13, 2019, Hestia Capital Partners and Permit Capital Enterprise Fund increased their stake to 5.46%.

On March 9, 2020, the company announced that it has appointed three new independent members to its Board of Directors

On March 12, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund (together 7.5%) delivered a letter to the Board responding to the Board changes announced by the company. In the letter, Hestia Capital Partners and Permit Capital Enterprise Fund detailed the Board’s indifference to stockholder input and how the Board seemed to only take action when faced with significant stockholder pressure.  In the letter, they expressed their belief that further Board refreshment was warranted, including with the addition of a stockholder representative to the Board.

On March 23, 2020, Hestia Capital delivered a letter to the company nominating two candidates for election to the Board at the 2020 annual meeting of shareholders. Also, Hestia Capital Partners and Permit Capital Enterprise Fund issued a press release, detailing the value destruction overseen by the Board over the past 5 years, explained why the recent Board refreshment was insufficient and called for two stockholder nominated voices to be added to the Board to replace two lame duck, long tenured directors who have already agreed to resign from the Board in 15 months.

On April 3, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund filed proxy materials seeking support for their nominees.

On April 6, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund filed proxy materials seeking support for their nominees.

On April 17, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund filed proxy materials seeking support for their nominees.

On April 24, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund filed proxy materials seeking support for their nominees.

On April 27, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund issued a press release announcing that they mailed a definitive proxy statement, including a White proxy card, to stockholders in conjunction with the 2020 AGM. They also sent a letter and a presentation to their fellow stockholders detailing why they believe the company’s recent Board refreshment is insufficient and highlighting the steps the company must take to maximize value for stockholders, including to (i) reduce the company’s bloated cost structure, (ii) better align management’s compensation with performance, (iii) address liquidity concerns, (iv) think outside the box (figuratively and literally) and (v) change the narrative – from dire to great.

On April 28, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund filed proxy materials seeking support for their nominees.

On May 19, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund issued an Investor Presentation titled “More Change Is Needed,”

On May 21, 2020, Hestia Capital Partners and Permit Capital Enterprise Fund issued a letter to the shareholders setting the record straight on the company’s poor track record of capital allocation. The letter details how seven of the current Board members caused the company to issue $825 million of debt from fiscal years 2012 to 2016, largely to undertake a $1.3 billion share repurchase at an average price of $29.86 per share, while six of these same Board members sold approximately $35.8 million of their own stock at an average price of $47.93 per share during this time. 

On May 26, 2020, the Stockholder Group issued a supplemental presentation and posted it to https://www.RestoreGameStop.com

On May 27, 2020, the Stockholder Group issued a rebuttal presentation titled, “GameStop’s Investor Presentation Reinforces the Need for More Change”. The rebuttal presentation details how GameStop’s recent investor presentation, which was put forth by the newly reconstituted Board, includes many false and misleading statements about the Company’s performance and the Investor Group’s nominees, highlighting the need for more Board change.

On June 1, 2020, the Stockholder Group issued a press release in response to the company’s claims that the Investor Group had rejected a settlement proposal to avoid a proxy contest at the company’s upcoming annual meeting of stockholders scheduled for June 12, 2020. The Investor Group urges stockholders to support its call for change at the Company by voting the WHITE proxy to elect its slate of two experienced nominees, Paul J. Evans and Kurtis J. Wolf, at the 2020 annual meeting.

On June 2, 2020, the Stockholder Group announced that ISS has recommended that stockholders vote the Investor’s Group WHITE proxy card FOR the election of Paul J. Evans and Kurtis J. Wolf at the company upcoming annual meeting of stockholders on June 12, 2020. Source

On June 3, 2020, the Stockholder Group announced that Glass Lewis has recommended that stockholders vote the Investor’s Group WHITE proxy card FOR the election of Paul J. Evans and Kurtis J. Wolf at the company upcoming annual meeting of stockholders on June 12, 2020. Source

On June 12, 2020, the Stockholder Group announced that according to the preliminary voting results from the 2020 Annual Meeting, Kurtis J. Wolf and Paul J. Evans were elected to the Board at the 2020 Annual Meeting. Source

On September 8, 2020, Permit Capital reduced its stake to 4.79%.