GameStop Corp decided it could not seize on the Reddit-fueled rally in its shares to sell hundreds of millions of dollars worth of stock because of regulatory restrictions, according to three people familiar the US video game retailer's internal deliberations.
The Grapevine, Texas-based company found itself at the epicenter of an unprecedented trading frenzy last month, as amateur investors organized on social media sites such as Reddit to bet against Wall Street hedge funds that had shorted its shares.
While many heavily shorted stocks, from movie theater operator AMC Entertainment Holdings Inc to headphone maker Koss Corp, also scored big rallies, "Gamestonk", as it was nicknamed by many online, including Tesla Inc CEO Elon Musk, became synonymous with the wave of trading speculation.
GameStop's market value soared from $1.4 billion on Jan. 11 to a peak of $33.7 billion on Jan. 28. At that point, GameStop could have raised hundreds of millions of dollars through a stock sale to pay down its debt pile, which totaled $216 million net of cash as of the end of October, and fund its transformation into a digital gaming service, as sales at its mall-based stores dwindle.
Yet GameStop never sold shares, the sources said, despite being egged on by many Wall Street pundits to do so. While it could still sell shares in the coming weeks, the opportunity to raise hundreds of millions of dollars has now slipped as the rally in its shares reversed. It now has a market value of $3.6 billion.
GameStop examined the possibility of selling stock during the rally, the sources said. The company had already registered with the US Securities and Exchange Commission (SEC) to sell $100 million worth of stock in December, an option it did not exercise, the sources added.
GameStop decided it was restricted under US financial regulations from selling shares because it was in possession of significant information about its finances that was not yet available to the public, the sources said. The SEC requires companies to have released such information when conducting stock sales.
The information pertained to GameStop's fiscal fourth quarter, which ended at the end of January. By the time 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 look like, the sources said.
GameStop could have gone ahead with a stock sale by releasing preliminary earnings. But such a move, carried out for the purposes of a stock sale, came with significant logistical hurdles and regulatory risk that the company was not willing to accept, one of the sources said. The SEC had said it would scrutinize how companies took advantage of the trading volatility to sell stock and had asked that they provide more information to investors about the potential risks.
A GameStop spokesman declined to comment. The SEC did not immediately respond to a request for comment.
"They were two and a half months into their quarter when all this stuff took place. It's so deep in the quarter that from a legal and corporate governance perspective they would likely be obligated to pre-announce some high-level financial information for the quarter. And that can't be prepared in just a week," said David Erickson, a finance lecturer at the University of Pennsylvania's Wharton School who was previously co-head of global equity capital markets at Barclays Plc.
AMC, AMERICAN AIRLINES
Other companies in the midst of the Reddit frenzy whose financial quarters finished at the end of December and had already updated investors on their latest financial performance, were able to sell stock when their shares rallied at the end of January.
AMC, whose movie theater business has been hurt by the pandemic, raised roughly $1.2 billion through debt and equity deals after its shares rallied more than 700%.
American Airlines Group Inc, which has also suffered as demand for flights plummeted, pulled the trigger on a plan to sell more than $1 billion of stock last month after its shares rallied as much as 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 big-box retailers.
Robert W. Baird & Co analysts wrote last month that the best outcome for GameStop shareholders would be for the company to close the majority of its physical stores and diversify into online businesses, including hosting tournaments and events.
One of GameStop's largest shareholders, online pet store Chewy Inc co-founder Ryan Cohen, and two of his partners joined the company's board in January. Last year, hedge funds Hestia Capital Partners and Permit Capital Enterprise Fund also won seats on the board.