GameStops 56 Billion Bid for eBay The Meme King vs. the Legacy Giant

Cohen sees eBay as having undervalued assets and believes there should be an aggressive effort to optimize these assets given that GME has a market cap of only $12 billion (which is David vs. Goliath on 1000 mg of steroids).

The Proposal Breakdown

Cash and Stock Structure 50:50 split valuing deal @ $55.5-56 billion. GameStop $9.4B cash on hand covers half if deal, $20B non-binding debt commitment from TD Bank to complete funding for the deal. Financiers most likely will issue more equity for balance of financing game.

Cohen's pitch for acquisition (eBay trades at 7.2x EV/EBITDA vs Amazon 18X) - although eBay grew 12% CAGR for marketplace GMV over the past year. Estimates $2B cost saves toward deal execution (supply chain synergies, headcount optimization, tech stack modernizations) will accrue within 12 month.

GameStop's 5% ownership is significant leverage in the transaction transaction. Cohen indicates if eBay board does not approve, potential proxy fight based upon GME being largest share-owner with fiduciary obligations to GME. Board members have confirmed receipt and are "Carefully Reviewing" - will provide feedback after their internal review has been completed.

Strategic Rationale: Meme Retailer Goes E-Commerce Serious

Cohen states that the auction format of eBay is under-evaluating its 73B GMV (€1.8B active buyers) and (1.8B listings).

GameStop can capitalize on its gaming/logistics expertise to quickly accelerate the collectibles vertical by 33% GME growth. The combined company will also be a formidable competitor to Amazon, Etsy and Poshmark across multiple categories.

Synergies identified:

• GME logistics combined with eBay warehouses will result in quicker delivery of merchandise to customers.
• GME's NFT/collectibles expertise will expand eBay's existing $10B trading card market by providing greater accessibility to buyers and sellers.
• Shared payment processing will produce annual cost savings of $800M.

Vision: Create a company that can compete head-to-head with Amazon for unique products (gaming, fashion, luxury resale/rare collectibles).

Financial Engineering Under the Hood

In order to solve the financing puzzle, ensure liquidity with the aggressive nature of this deal:

• Cash: $9.4B cash on hand to fund GME's portion.
• Debt: $20B in total debt committed to this transaction (calculated using 4.8% blended rate).
• Equity: Issuing $15-$20B in new equity (dilutive in nature, but mitigated by meme stock premium priced at $15-$20B).

The pro forma balance sheet consists of $28B Total Debt, 3.2x Net Leverage, $4.1B EBITDA, and Free Cash Flow generating sufficient enough to service debt and cover Dividends paid to shareholders (I believe this means you have enough FCF generated from EBITDA to cover existing Debt servicing as well as div/s to shr's). In Year 1 post-closing, Synergies generated by Cohen($2B) reduce leverage from 3.2x (before Synergies) down to 2.1x (after Synergies).

eBay appears to be undervalued compared to its peers. (P/E ratio=12x vs. -sector average of 22x). Thus, eBay appears to have a significant upside (20%) even assuming you are paying a 20% premium for the company at acquisition price. (In theory, you would still see a positive return, but long term it's virtually guaranteed.)

eBay's Defensive Position

The eBay board has a dilemma between appeasing shareholders with a 46% premium and concerns among management about being mismatched in culture and scale between multiple businesses. eBay has $2.6B in cash to fund stock repurchases through buybacks, pay special dividends, or perhaps give a ‘white knight’ to another company like Blackstone.

The board may implement a poison pill, but there are risks of a shareholder fight, as Cohan currently owns 5% of eBay’s stock and there has been considerable enthusiasm from individual investors. The potential exists for Cohan and other retail investors to influence the vote (reuters).

eBay has many strengths including a sticky market through collectibles; 28% YOY growth in trading cards, ability to achieve profitability with 18% margin; and over 40% of their revenue comes from international customers.

Market Reaction and Meme Momentum

The share price of GameStop soared by 18% in pre-market trading following the announcement. eBay shares increased by 12%, and retail trading volume is four times the daily average. posts on Superstonk and WallStreetsBets show how the community is embracing the return of Roaring Kitty with memes.

Options activity: GME May expiry $45 calls traded a volume of 12 times the initial amount. Call to put ratio at GME's short interest level (18%), indicating potential for a short-term upward price movement.

Strategic Alternatives

eBay is going to be able to buy $15 billion of their shares, pay out a special dividend, and spin off Poshmark as a new company.

There are some major companies that could act as a "white knight" or firm that helps out if eBay were to go down; they include Blackstone which is rumored to have offers to purchase up to $40 billion, Shopify, and Walmart.

If the Activist shareholders are unable to unlock value using an activist campaign through potential changes to the Board of Directors, then there is the potential for eBay to go their own way and unlock value for themselves.

The Bigger Retail Reckoning

The future of retail lies in a combination of physical and digital properties, as well as a new economy driven by collectibles and personal engagement. Cohen believes that combining the fervor surrounding memes with operational discipline will create value for his shareholders.

Many companies are underestimating the power of retail investors, and the $56 billion bid for eBay is a tangible example of this. Expect to see the response from eBay on May 15 and to see the response from TD's debt/funding provider, as well as to see short covering on GME (GameStop).

Meme King versus Legacy Giant: may the best operator win!