Blockbuster and GameStop Sitting in a Tree . . .
Over the past year, Blockbuster has been selling off their assets in an attempt to build operating capital, as well as to focus on their core video rental strategies. Most of this divestiture has come from video store liquidations overseas, but GamesIndustry.biz is reporting that Blockbuster analyst Michael Pachter thinks that Blockbuster could be interested in selling off their UK based Game Station stores to GameStop for $70 million. Pachter estimates the selling price at 1/2 of Blockbuster’s current sales at their Game Station division and thinks that between, Blockbuster’s desire to sell the company and GameStop’s desire to expand opperations that it would be a perfect fit.
“We think that Blockbuster is committed to selling its Game Station stores before year-end, and think that it makes eminent sense for GameStop to close any potential acquisition ahead of the key holiday selling season. As we believe that it is in both companies’ best interests to close a transaction before the holidays, and think that this transaction makes sense for both parties, we expect to see a transaction during the October quarter.”
$70 million could raise some liquidity for Blockbuster and allow them to focus more heavily on building a VOD strategy or on managing their existing stable of stores, but it would also impact their revenue and their diversification in the video store business. If video rentals continue to come under pressure from Netflix, VOD and new alternative entertainment choices, selling of these stores could be a mistake. On the other hand, the success of Microsoft’s Live Arcade demonstrates that video games won’t be immune to VOD pressures either.
In the end, it will be interesting to see what happens to Blockbuster’s game program if they do sell Game Station to GameStop. Netflix has yet to offer a video game strategy and while it’s expensive to maintain video games, I do think that this is big competitive advantage for Blockbuster and would love to see them implement some type of games program.
“In our view, should GameStop weigh the merits of a ‘build vs.buy’ analysis, it would decide to purchase the Gamestation stores for USD 70 million rather than build out new stores for USD 125,000-200,000 apiece and incur negative operating leverage while its new stores mature,” Pachter argued. “By purchasing the Game Station assets, GameStop could eliminate a key rival and immediately jump start sales in the UK, allowing it to grow EPS [earnings per share] almost immediately.”
GameStop wouldn’t comment on the rumors, but Pachter does make a pretty strong argument for why this makes sense for both companies and it will be interesting to see if his speculation turns out to be correct. In the long run, I continue to believe that all of our media will be digitally distributed, but it could take years for this shift to happen and in the meantime, Game Station could produce quite a bit of cash flow for whoever ends up owning them.
Posted on July 18th, 2006 by Davis
Filed under: Disclosure - I own stock in co. mentioned, Netflix
[...] Over the last few years, Blockbuster has been selling off their international operations piece by piece, in an attempt to return the company to profitabilty and to pay down the debt on their balance sheet. Over the last six months, we’ve seen speculation that Blockbuster is planning on selling their UK game division and in fact, they even took the unusual step of filing an 8K last September, indicating that a sale may or may not still be on the table, after a representative for the company told a UK trade group that they were planning on opening additional video game stores in 2007. [...]