LON:GMD | Game Digital Plc - Selling Products, Services And Experiences!

3rd Apr '18 by Dearg Doom

11 comments 4315 reads

GAME Digital (LON:GMD)

Market Cap £49.3 million

Enterprise Value £-32.9m

Share Price 28.5p

Bid/Offer 28p/29p Normal Market Size 10,000

Introduction

Good time to do some deeper analysis having just purchased shares twice today. Obviously, my green eyes had been opened wider when I noticed a negative Enterprise Value. This loss-making company is awash with cash!

Game Digital plc reported a £10.4 million loss for the year ending July 2017, whereas, in the previous year, the company had a net profit of £7.1 million. So we are burning cash at a rate of £1.5 million a month. Notice how "we" slip into sentences once you become a shareholder.

About the Company

Game Digital Website Link

A lossmaking video games and consoles retailer of nearly 300 retail outlets. Far too many outlets to meet current and future demand. On a more positive note, the company is developing their BELONG concept where software game enthusiasts can take their skill level seriously and want to play others as individuals or teams in live events.

Game Digital is all about retail, esports, events and brands.

Key Events

(i) Disposal

Game Digital sold its Multiplay Digital during the year which was completed in November 2017 for a cash consideration of £19.0 million.

(ii) BELONG Concept

BELONG is a high margin business worth pursuing, Game Digital have reached a collaboration agreement with Sports Direct, which includes plans to roll-out the BELONG gaming proposition for approximately 100 BELONG arenas within 3 years, including Sports Direct own stores. Game Digital got £3.2 million from Sports Direct for a 50% share of profits now split 50/50 as well as a borrowing arrangement to expand concept.

By expanding our existing Insomnia festivals and continuing the establishment of BELONG arenas in stores, we are providing the means for people to come together to watch, socialise, play and compete both online and in physical venues.

(iii) Retail Losses

To stem losses from their retail, the company has achieved operational efficiencies and cost savings of circa £5 million during the year. This required shop closures, working hours changes for staff and rent renegotiation of existing retail outlets. The right-sizing of this…

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Dearg Doom

10th Apr '18

Share Price 37.5p +1.8p (+4.3%)
Bid/Offer 37p/38p

A huge volume of 60 million shares traded in last hour. Something is happening or at least a short-term bottom to share price has been found. Sports Direct at play springs to mind or Game Digital buying back its own shares.

Decided to top up and go with the momentum while waiting for further RNS news.

Regards

@MyDeargDoom

Howard Marx

Those trades at 35p must be Elliot's 37% stake (given that they aggregate to around 63 million)

Will be interesting to watch the RNS to see where they have ended up

But on the basis that there has been no bid launched, they must have gone to multiple buyers

(if Sports Direct had purchased more than 7.3 million, it would have resulted in a holding of over 30% of GAME Digital (LON:GMD) & hence been required to make a bid for the remainder)

Gromley

That would make sense Howard, they must have effectively placed the shares with a handful of instis. I certainly seems to have caused a bit of a flurry of activity, with a fair number of smallish trades following, so there may be a bit of froth to come of over the next few days. Overall though having cleared out a loose holder should be good news going forwards, although one or more of the buyers might be just acting as intermediaries looking to trade out the shares for a small turn.

Will be interesting to see those holding notices.- four of those positions would be notifiable in their own right and the others are around 2% each so could easily push anyone already holding over a notification threshold.

Certainly the Elliott stock overhang appears to have now gone Gromley, which is good news.

GAME Digital (LON:GMD) had a very narrow shareholder base prior to today - it could certainly do with some widening:

monions

11th Apr '18

Howard,

Can I ask where you got the major shareholder holdings information? I often find that difficult (impossible) to find.

monions

The holdings data came from http://www.4-traders.com/

Just enter a company name at the top of the page, then select the 'company' tab (just below the share price)

Thank you Howard.

12th Apr '18

Share Price 38p (-11.5% today)

Bid/Offer 37.80/38.20p

Share price under pressure late afternoon. There was almost 1.4 million shares traded by the close.

After 4 p.m. came a flurry of RNSs that confirmed what was already suspected and that was Duodi Investments has disposed of their entire 36.98% holding in the Company. Consequently, James Shinehouse (Duodi's current board representative) is stepping down as Non-Executive Director of the Company, with effect from today.

Mostly new institutional buyers have bought the shares at a discount to almost everything else on the market. The new institutional shareholders include Miton 13%, Cancord Genuity 11.8%, and Hambro Capital 5.12%.

Today's share price drop today was due the takeover premium disappearing instantaneoulsy. Now, we are back to fundamentals with a share price floor of 35p.

One thought crossing my mind is that Sports Direct ( a major shareholder) had an opportunity to buy the company at a bargain price. Why did they not? Maybe the new concept has not proved itself to their satisfaction as yet.

bsharman

13th Apr '18

I was pleased to see Miton buying 13% of GAME Digital (LON:GMD)

I think Sports Direct are probably biding their time and waiting to see how the new format performs initially.

17th Apr '18

Personally I don't think Sports Direct were or are interested in buying the company in full.

The Collaboration is quite complex I believe, giving SPD :

50% of the Intellectual Property of Belong (but not other assets)
50% of the profits of ALL Belong venues.
50% of the profits of any Game stores within SPD premises.
But none of the capex or risk as I understand it.

All this for £3.2m plus loans to GMD (at commercial rates).

At face value this would seem to favour SPD (although one has to take a view on how value access to SPD locations is)

It would not make sense, to me, to bother to construct a deal like this if you were planning to buy out the whole company anyway. Given what Elliot do, it would have been quite obvious that their stake was available for the right price (perhaps less obvious that the price would be so 'low'), so having taken their initial stake GMD could have proactively approached Elliot. (I would imagine though that you are right and that having made the decision to sell Elliot gave first refusal to SPD).

It seems more likely to me that SPD bought their stake to gain a seat at the table / leverage the Collaboration agreement. I think the situation with Debenhams (LON:DEB) is similar.

I mentioned earlier in the thread that the big trades going through sparked a large number of smallish buys and I thought (and still think) that this was a lot of PIs suspecting a takeover was in the offing.

My thinking now is that much as was the case with the SCSW tip back in November, these PIs will get bored and sell out bringing the price back down - hence I'm happy still to be on the sidelines here - despite thinking this is a potentially very interesting situation.

I've also heard it suggested that Mike Ashley likes to have a "punt" on the shares of bombed out retailers - I don't know if this is true, nor if he would be allowed to do this with SPD shareholders money. However , I will in due course try a bit of research on this as it seems to me that rather than being a buyer SPD could be a seller if my hypothesis of the shareholding being to leverage the collaboration - that job is now done.

I'll probably prove to have been "too clever by half" here, but my "punt" is that the shareprice has a way to come 'off' before the results of an accelerated BELONG perhaps begin to support a higher rating.

Just my opinion of course, so no recommendation intended.

abtan

I completely agree with this.

I topped up when the SP hit the 20s recently and sold out last week after the rise, expecting no takeover (thanks to those in this forum who logically predicted this given the multiple tranches of sales).

As far as I understand, there is unlikely to be a takeover in the near future either.

In the short term I believe enough investors will get bored and the share price will drop, after which I will likely buy back in. And if it doesn't drop, I'll likely buy back in anyway as I see huge potential for GAME Digital (LON:GMD) in the next few years. Hopefully I'm not trying to be too smart with my trading strategy....

Game Digital plc - Selling Products, Services and Experiences!

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Dearg Doom

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GAME Digital (LON:GMD)

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