By Jessica DiNapoli, Svea Herbst-Bayliss and Joshua Franklin
(Reuters) – GameStop Corp decided it could not take advantage of the Reddit-driven rise in its shares to sell hundreds of millions of dollars in shares because of regulatory restrictions, according to three people familiar with the internal deliberations of the video game retailer of USA.
The Grapevine, Texas-based company found itself at the epicenter of an unprecedented commercial frenzy last month, when amateur investors organized themselves on social media sites like Reddit to bet against Wall Street hedge funds that had sold their shares. .
While many heavily sold shares, from movie operator AMC Entertainment Holdings Inc to headphone maker Koss Corp, have also seen huge increases, “Gamestonk”, as it has been dubbed by many online, including Tesla Inc CEO Elon Musk. synonymous with the wave of commercial speculation.
GameStop’s market cap skyrocketed from $ 1.4 billion on January 11 to a peak of $ 33.7 billion on January 28. At that point, GameStop could have raised hundreds of millions of dollars through a sale of shares to pay its debt, which totaled $ 216 million net of cash in late October, and finance its transformation into a digital game service, as sales at your stores in malls decrease.
Still, GameStop never sold shares, the sources said, despite being prompted by many Wall Street experts to do so. While it may still sell shares in the coming weeks, the opportunity to raise hundreds of millions of dollars has now fallen, with the reversal of its stock recovery. It now has a market value of $ 3.6 billion.
GameStop examined the possibility of selling shares during the boom, the sources said. The company had previously registered with the United States Securities and Exchange Commission (SEC) to sell $ 100 million in shares in December, an option it did not exercise, the sources added.
GameStop decided it was restricted by U.S. financial regulations to sell shares because it had significant information about its finances that was not yet available to the public, the sources said. The SEC requires companies to disclose this information when conducting stock sales.
The information refers to GameStop’s fourth fiscal quarter, which ended in late January. When its shares took off in the second half of January, company executives had already compiled data and had a clear picture of what the quarter would be like, the sources said.
GameStop could have continued with a sale of shares releasing preliminary earnings. But such a move, carried out for the purpose of a share sale, came with significant logistical obstacles and regulatory risk that the company was not willing to accept, said one of the sources. The SEC said it would look at how companies took advantage of trading volatility to sell shares and asked them to provide investors with more information about potential risks.
A GameStop spokesman declined to comment. The SEC did not immediately respond to a request for comment.
“They were within two and a half months of the quarter when all this happened. It is so deep in the quarter that, from a legal and corporate governance perspective, they would probably be required to announce some high-level financial information for the quarter in advance. And it can’t be prepared in just a week, “said David Erickson, professor of finance at the University of Pennsylvania’s Wharton School, who was previously co-director of global equity capital markets at Barclays Plc.
AMC, AMERICAN AIRLINES
Other companies in the midst of the Reddit frenzy, whose financial quarters ended in late December and already updated investors on their latest financial performance, were able to sell shares when their shares recovered in late January.
AMC, whose movie business was hurt by the pandemic, raised about $ 1.2 billion through debt and equity deals after its shares rose more than 700%.
American Airlines Group Inc, which also suffered from falling demand for flights, pulled the trigger on a plan to sell more than $ 1 billion in shares last month after its shares rose by 48%.
GameStop has lost market share to larger competitors, including Best Buy Co Inc and Amazon.com Inc, as consumers buy video games online or through major retailers.
Analysts at Robert W. Baird & Co wrote last month that the best outcome for GameStop shareholders would be for the company to close most of its physical stores and diversify into online businesses, including tournaments and events.
One of GameStop’s largest shareholders, the co-founder of the online store Chewy Inc, Ryan Cohen, and two of its partners joined the board in January. Last year, hedge funds Hestia Capital Partners and Permit Capital Enterprise Fund also won seats on the board.
(Reporting by Jessica DiNapoli in New York, Svea Herbst-Bayliss in Boston and Joshua Franklin in Miami; edited by Greg Roumeliotis and Grant McCool)