Game Shares Crash As It Fights To Survive

Published in Company Comment on 12 March 2012

Shares in the videogame retailer collapse as low as 0.5p as it warns of supplier problems.

This morning, GAME Group (LSE: GMG) released an announcement to shareholders that may well prove to be one of the last issued by the struggling retailer.

GAME on the brink

In its statement, GAME admitted that it "remains in discussions with its suppliers and lenders in relation to terms of trade that allow the business to operate within the facility provided by its banking syndicate... While these discussions are ongoing, it has not been possible to source new products from a number of suppliers".

Gaming buffs will already be aware of GAME's ongoing dispute with leading games studio Electronic Arts (NASDAQ: EA.US), whereby EA has refused to supply GAME with copies of Mass Effect 3, its latest blockbuster, and other titles such as Tiger Woods 13. Also, GAME isn't stocking Nintendo's Mario Party 6, as well as Namco's Tekken for the 3DS and some titles for the new PlayStation Vita console.

Why would leading software suppliers stop supplying Europe's largest high-street games retailer? The simplest answer appears to be they fear that GAME will not be able to make payment for new titles. Hence, they are withdrawing credit lines and refusing to supply the retailer with games without payment upfront.

As a result, GAME has warned that it is in "ongoing discussions with suppliers, seeking access to the original facility or alternative sources of funding, and reviewing the position of all of its assets in the UK and international territories".

However, the big blow for shareholders comes in the statement's final paragraph, which reads: "It is uncertain whether any of the solutions currently being explored by the Board will be successful or will result in any value being attributed to the shares of the Company."

Shares slump

As soon as the London Stock Exchange opened this morning, investors rushed to the exits, ditching GAME shares by the millions. GAME's share price fell as low as 0.5p, before bouncing back to trade at 1.64p as I write. This 53% drop in GAME's share price sent the group's market value crashing to a mere £5.5 million.

At their peak in May 2008, GAME shares changed hands at £3, so it has suffered a spectacular fall from grace. Indeed, the big question now is whether GAME can survive and avoid following a string of other wounded retailers into administration. GAME's biggest problem is holding off its banks, as the group revealed net debt of £91 million in its first-half results released last July.

Only last month, GAME's lenders agreed to revise the group's banking covenants in order to allow it to continue trading. However, this consortium of banks, led by Royal Bank of Scotland (LSE: RBS), demanded a high price from GAME: namely, that it sells its international stores. In addition, the group is shrinking its home footprint and aims to close 50 of its 600 UK outlets by next year.

On 2 February, GAME forecast that it would lose £18 million before tax and exceptionals in its financial year ending 31 January 2012. Alas, GAME's sales trajectory and operating margins are most likely still heading south, especially given that it is struggling to stock its shelves in the face of stiff competition from internet-based retailers.

GAME over?

With analysts warning that there is a real possibility of GAME collapsing into administration, its shares are suitable only for gamblers and speculators.

If GAME does go under, the most likely buyer of its business, brand and assets would be US-based specialist games retailer Gamestop. In these circumstances, Gamestop is likely to drive a hard bargain, which would mean that GAME shares would be worthless and its lenders would have to take a haircut.

Finally, some Fool readers may be surprised that British retailers are continuing to struggle, even though it is three years since the UK bounced back after the global financial collapse and economic downturn eased. Sadly, companies with falling revenues and margins that are weighed down with debt and struggling with cash flow remain vulnerable to consumer belt-tightening and online rivals.

In short, if GAME Group does go into administration, then it won't be the last high-street name to hit the buffers!

More from Cliff D'Arcy:

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ANuvver 12 Mar 2012 , 12:59pm

Call of Basket IV - Modern Markets... a uniquely immersive First-Person-Investor adventure.

CunningCliff 13 Mar 2012 , 12:17pm

The worst thing were GAME to go into administration would be the job cuts for its workers. Whereas shareholders only have only ~1p per share to lose, 10,000 people fear for their livelihoods! :0(


WealthyInvestor 13 Mar 2012 , 9:05pm

Game is a classic zombie business. At the current price point, one does have to wonder whether it's worth a speculative punt on the basis that a buyout from a larger player (from the US) may see a significant, albeit short-lived, gain. Nerves of steel required.

FatSuperman 14 Mar 2012 , 11:53am

Nerves of steel definitely required, scalpers are going crazy on it today, up 30% if you had some from last night. Can't be dealing with the stress myself :)

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