Can Gamestop save Blockbuster?

It would take some accounting magic, but a buyout of the video game store could save BBI

By InvestorPlace Mar 23, 2010 7:44AM

gamestop gme blockbuster bbi buyoutGamestop (GME) is Wall Street’s favorite dog to kick around. Shares are down 20% from the lows of 2009 despite a red-hot rally of about 70% in the broader market. That makes it one of the 10 worst performers in the last year.

 

The reasons are crystal clear: As consumer spending dried up, all but the hard-core gamers cut back on spending. And despite a bit of strength around the holiday season, video game sales have done nothing but drop. The details from February’s video game sales report a few weeks back showed more of the same, and GME continues to pay the price.

But is the brutal fall of GME entirely fair? Some companies say the answer is no, and they are looking to game Gamestop’s decline as a shot for a bargain basement acquisition. And if execs at Blockbuster (BBI) can work some accounting magic, could be a potential buyer of GME.

 

There’s no doubt it would take some financial acrobatics for Blockbuster to execute a merger while it’s bleeding red ink. and the CEO has admitted Chapter 11 is a possibility now that the company is faced with nearly $1 billion in debt and limited prospects for paying the interest on that debt.


But if Blockbuster can just weather the near-term, it may be alright. The company has closed hundreds of retail stores and is adding rental kiosks (similar to the popular Redbox offerings) as fast as it can, aiming to get 7,000 into the field this year. The company also has a video-on-demand service, but it has not caught on widely to this point. If that business ramps up, BBI could be much better off.

 

BBI may have time on its side, too. Short interest represents about 15% of outstanding shares of Gamestop so the stock could stay at an attractive price long enough for the company to get its act together.

 

Yes, those are a lot of “ifs.” But stranger things have happened. And Gamestop has its share of troubles too that have been casting shares in a negative light -- including a 9.2% drop in hardware sales last quarter, and a 3.7% slide in earnings.

 

Blockbuster needs to latch on to something to stay afloat, and if it can free up enough cash GME could be just the life preserver it needs. Again, the list of “ifs” is taller than a stack of marked-down new releases at Blockbuster’s checkout, but in a fight for survival companies have been known to get creative to keep the lights on.

 

Chances are Blockbuster won’t wind up with Gamestop. But if there’s even an outside chance that this partnership can work, executives at BBI should pull out all the stops to try and make it happen.

 

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