(Reuters) – GameStop Corp decided it couldn’t take advantage of the Reddit-fueled rally in its stock to sell hundreds of millions of dollars in stock due to legal restrictions, according to three people familiar with the US video game store’s internal deliberations.
Texas-based company Grapevine found itself at the epicenter of an unprecedented trading frenzy last month, when amateur investors organized on social media sites like Reddit to bet against Wall Street hedge funds that had shorted their stocks.
While many high-short stocks, from movie theater operator AMC Entertainment Holdings Inc to headphone maker Koss Corp, also scored major rallies, ‘Gamestonk,’ as it was called by many online, including Tesla Inc CEO Elon Musk, became synonymous with the wave of speculation. in the trade.
GameStop’s market value increased from $ 1.4 billion on January 11 to a peak of $ 33.7 billion on January 28. At the time, GameStop could have raised hundreds of millions of dollars through a stock sale to pay off its debt stack, which totaled $ 216 million. net of cash as of the end of October, and finance the transformation to a digital gaming service as sales in the malls decline.
Still, GameStop never sold stock, the sources said, despite many Wall Street experts being urged to do so. While it could still sell stock in the coming weeks, the opportunity to raise hundreds of millions of dollars has now passed as the surge in its stock reversed. It now has a market value of $ 3.6 billion.
GameStop was exploring the possibility of selling shares during the rally, the sources said. The company had already registered with the U.S. 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 that it was illegal under US financial regulations to sell stock because it was in possession of important information about its finances that was not yet available to the public, the sources said. The SEC requires companies to disclose such information when selling stock.
The information related to GameStop’s fiscal fourth quarter, which ended in late January. By the time its stock took off in the second half of January, company leaders had already gathered 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, taken in view of a stock sale, presented significant logistical hurdles and regulatory risks that the company was unwilling to accept, one source said. The SEC had said it would investigate how companies would use trade volatility to sell shares and had asked to provide more information to investors about the potential risks.
A GameStop spokesperson 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 these things happened. It is so deep in the quarter that from a legal and corporate governance perspective they would likely be required to announce predetermined high-level financial information for the quarter. And that cannot be prepared in just a week, ”said David Erickson, a finance professor at the Wharton School at the University of Pennsylvania and formerly co-head of global equity markets at Barclays Plc.
AMC, AMERICAN AIRLINES
Other companies in the midst of the Reddit frenzy whose financial quarters ended in late December and had already notified investors of their latest financial performance were able to sell stocks when their stocks recovered in late January.
AMC, whose movie theater company has been hit by the pandemic, has raised about $ 1.2 billion through debt and equity deals after its shares surged more than 700%.
American Airlines Group Inc, which has also suffered from declining demand for flights, pulled the trigger on a plan to sell more than $ 1 billion in stock last month, after shares rose a whopping 48%.
GameStop has lost market share to bigger competitors including Best Buy Co Inc and Amazon.com Inc as consumers purchase 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 if the company closed most brick-and-mortar stores and diversified into online businesses, including hosting tournaments and events.
One of GameStop’s largest shareholders, the co-founder of online pet store Chewy Inc, 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.
Reporting by Jessica DiNapoli in New York, Svea Herbst-Bayliss in Boston, and Joshua Franklin in Miami; edited by Greg Roumeliotis and Grant McCool