GameStop M&A Opportunity
So GameStop got the Apes into a tizzy when they mentioned potential acquisitions. Let's breakdown some M&A (Mergers and Acquisitions) insights before we get to a potential/realistic opportunity IMO....cough...batteries....
Why does a company pursue a merger or acquisition? It’s a high-risk high-reward strategy that requires significant time, effort, and capital.
Reasons to make an acquisition?
Capture value: Acquire an undervalued business, that GME believes their resources could extract unseen value.
Acquire technology or expertise.
Diversify: Expanding into adjacent categories that cater to the same customer but don’t directly compete with existing supplier relationships. This reduces supplier risk and revenue risk.
Create operating synergy: Two brands one back office. Use assets for multiple purposes.
Time to market: Expanding into a new category without the capital cost and time cost of building from the ground up. Expanding into a new geography.
Horizontal integration: Acquire a competitor (remove competition) increase market share.
Vertical integration: Acquire suppliers/vendors to grow topline sales and increase margin.
Cross-selling: acquire products/services that allows GME to up-sell their consumer. People prefer a one-stop-shop and try to optimize time for shopping by acquiring all the necessities from the same roof.
Optimize taxation.
Increase revenue: Acquisitions for the sake of growth tend to fail.
Revenue Synergies: Greater Market share % and brand recognition. Cross selling/upselling/product bundling opportunities. Geographic expansion. Pricing power from reduce competition. Access to new end markets and customer types
Cost Synergies: Eliminate overlapping workforce functions and reduced headcount. Reduce professional service fees. Consolidate redundant facilities. Negotiating leverage over suppliers.
M&A Structures
Horizontal integration
Vertical integration
Reverse Merger
Conglomerate Merger
Divesture
Spin-off
Forward integration
Backward integration
Merger Arbitrage
Cash versus stock acquisition
Why use stock?
For the acquirer, the main benefit of paying with stock is that it preserves cash. For buyers without a lot of cash on hand, paying with acquirer stock avoids the need to borrow in order to fund the deal.
For the seller, a stock deal makes it possible to share in the future growth of the business and enables the seller to potentially defer the payment of tax on gain associated with the sale.
Asset Sale
Acquiring a Target’s assets. In an asset sale, the Target retains possession of the legal entity, and the Acquirer purchases individual assets of the company. The Target also retains the liabilities.
Stock Sale
Through a stock sale, the buyer purchases the selling shareholders’ stock directly thereby obtaining ownership in the seller’s legal entity. With stock sales, buyers lose the ability to gain a stepped-up basis in the assets and thus do not get to re-depreciate certain assets.
The acquirer purchases all assets and liabilities.
Sellers often favor stock sales because all the proceeds are taxed at a lower capital gains rate.
M&A Modeling
Measures the estimated accretion or dilution to an acquirer’s earnings per share (EPS) from the impact of an M&A transaction. In M&A transactions, “accretion” refers to an increase in the pro forma EPS post-deal, whereas “dilution” indicates a decline in EPS after transaction-close.
EPS Accretion/dilution = Pro Forma EPS/Acquirer EPS – 1
Accretion/Dilutive Acquisitions
A decline in EPS (i.e. “dilution”) tends to be perceived negatively and signals the acquirer might have overpaid for an acquisition – in contrast, the market views an increase in EPS (i.e. “accretion”) positively.
GameStop M&A
Should they pursue acquisitions?
Is the ROIC better spent on inorganic (acquisitions) or organic growth?
Is GameStop lacking in a sector, product, demographic that an acquisition would solve?
What acquisition would improve EPS, margins, revenue, etc.?
What Target criteria is necessary for an acquisition? Enterprise value, quality of revenue, gross margin, operating margin, consumer demographic, EBITDA, etc.?
What size company could GameStop acquire? With their cash on hand, the potential to use stock, and a healthy amount of debt (I doubt debt would be used), I believe the EV range of companies GameStop could acquire is $100m - $5bn. The higher end of this range would probably take the form of a merger not acquisition.
Now on to the acquisition opportunity.....
Batteries Plus Acquisition Thesis (Just for you Turd)
Batteries Plus Summary
Batteries Plus was founded in 1988. Batteries Plus sells consumer electronic batteries along with commercial batteries for medical devices, hospitals, construction equipment, boats, RVs, and other commercial applications. Batteries Plus has a long private equity history with Red Top Capital acquiring the business in 1995 then selling it to Roark Capital in 2007. In 2016, Freeman Spogli & Co. acquired it from Roark Capital.
Batteries Plus is headquartered in Milwaukee, WI. Batteries Plus also owns a distribution facility in Milwaukee that services 100% of their company-owned and franchisee store locations.
Batteries Plus franchises stores across the US. Franchise stores total 620 and Batteries Plus operates 100 company-owned stores. This has grown from 630 total stores in 2016. The average franchisee owns 44 locations. Batteries Plus has 120 franchisee owners across 620 stores.
Batteries Plus offers battery recycling and electronic recycling through their partner East Penn, who picks up weekly from stores.
Franchise Costs
Batteries Plus charges an initial fee of $49.5K, a 5% monthly net sales royalty, and 4% of net sales for national and local marketing. Franchisees are also responsible for inventory and leases.
Store Metrics Overview
The top 10% of Batteries Plus stores generate $1.9m in annual net revenue.
The top 44% generate $1.2m in annual net revenue.
The bottom 280 stores generate between $528K and $887K.
Batteries Plus company-owned stores generate between $1m - $1.5m in annual net revenue.
The average franchisee store level EBITDA margin in 2022 was 15%.
Stores average sqft is between 1200-1600.
70% of store revenue is consumer battery. 30% of store revenue is commercial revenue.
Commercial revenue is typically contracted. Commercial revenue includes school districts, construction equipment companies, hospitals, medical device manufacturers, RV dealerships, rental car companies, etc.
2/3rds of the batteries sold at Batteries Plus are illegal to ship via plane. Limits Amazon competition.
Financial Overview
Batteries Plus generated between $625m - $700m in 2022 sales.
Batteries Plus the Franchisor generated between $125m - $175m in 2022 net sales.
Company-owned store level EBITDA was 15% or $18m in 2022. Franchisor EBITDA is considerably higher do the relatively cost-efficient business model. Franchisor EBITDA was around $18m or a 55% EBITDA margin.
Acquisition Merits
Product Diversification: Expand into an adjacent category of batteries that doesn’t directly compete with existing supplier relationships. This reduces supplier risk and revenue risk.
Supplier Diversification: Batteries Plus would reduce GameStop’s reliance on large video game companies that they compete against i.e. Microsoft, PlayStation, Nintendo.
Reduce Seasonality: GameStop is a seasonal business that is heavily reliant on console cycles, video game releases, and the holidays. Batteries Plus offers shelter from seasonality. Batteries Plus also reduces supplier/vendor risk as it diversifies GameStop away from AAA game developers, Microsoft, Nintendo, and PlayStation.
Expand customer demographic: Batteries Plus brings a new but familiar customer to GameStop.
Increase quality of revenue: Batteries Plus commercial contracted revenue improves the quality of revenue GameStop would generate. Long-term contracts with commercial business is more appealing than consumer sales.
ESP Accretive: Batteries Plus would bring an attractive EBITDA margin that would immediately improve GameStop’s EPS.
Improve utilization rate: Batteries Plus and GameStop crossover on electronic recycling. GameStop could increase the utilization rate of the recycling facility by increasing electronic recycling from Batteries Plus.
Retailer Defensibility: Batteries Plus offers products that are illegal to ship via plane which makes it difficult for Amazon to compete. Commercial batteries offer a moat for GameStop that reduces competitor risk i.e. Target and Walmart can’t compete and don’t offer commercial battery services.
Profitability vs. Growth: Batteries Plus offers an immediate improvement to GameStop’s fundamentals along with modest growth potential over the next 5 years. Fundamental improvement NOW is more valuable than future potential growth. The current market environment rewards better fundamentals.
Asset Light Business Model: The franchisee model means GameStop wouldn’t be acquiring many new store leases.
Familiar business: Batteries Plus is a brick-and-mortar retailer, something GameStop is acutely experienced in.
Quick integration: The franchise model doesn’t require integration of thousands of employees, large HR systems, payroll systems, etc. It would be a quicker integration that wouldn’t distract GameStop mgmt.
Battery and Electronic recycling
Batteries Plus outsources battery and recycling to East Penn. GameStop could leverage their recycling facility to fix and sell more tables and phones, a higher margin product channel. GameStop could continue to outsource battery recycling to East Penn.
This image was directly taken from their website and overlaps with GME.
Distribution Facility
GME’s only distribution center west of the Mississippi is Texas. In theory, you could close the Toronto DC and have the WI DC serve all of Canada and the Pacific NW.
Significantly cut down on logistics costs in shipping product to the PacNW and Western Canada.
Valuation
Using peer EV/EBITDA comps, Batteries Plus could be valued between $350m - $400m. Running an Accretive/Dilutive EPS Analysis, I believe Batteries Plus could significantly improve GameStop’s EPS. Batteries Plus would be a 91% EPS accretive acquisition. I believe the market would look favorably at this acquisition.
GameStop has enough cash on hand to make an acquisition of this size without putting themselves in a tight cash position. This acquisition would also be profitable and immediately add to GameStop’s bottom line and more importantly, Batteries Plus wouldn’t require additional cash to fund operating losses.
The stores even kinda look the same...
NOT FINANCIAL ADVICE. DO YOUR OWN RESEARCH! MY ASSUMPTIONS ARE JUST THAT, ASSUMPTIONS.