There's a fight a-brewing at troubled gaming retailer GameStop (GME) , and the evidence has been arriving in my mail and on a couple of voicemail messages left on our home phone. I've received no less than three proxy cards from the company soliciting my vote for the company's slate of directors as it wages in a proxy fight with activist investors Hestia Capital Partners and Permit Capital. The voicemail messages were also from the company's board of directors, imploring me to vote their "blue" proxy card. All of this for my relatively small take, purchased only to put some skin in the game for my annual Tax Loss Selling Recovery Portfolio.
GME has had a rough run in recent years due to declining revenue and changes in the gaming markets, and the stock, which traded in the mid $40's less than five years ago, now languishes in the mid-$4 range. In the proxy fight, the company points out what it deems as "successes":
- Generation of $62.3 million in adjusted operating income in 2019
- February 2019 sale of Spring Mobile for $700 million
- Improved capital structure, including reduction in debt from $821 million in FY 2019 to $420 million in FY 2020
- 2019 Dutch Tender/open market stock purchases of 38.1 million shares
- Cost reduction of $130.4 million for the year
- Decreased inventory
- Year-end cash balance of $499 million, or $7.61 per share
For its part, the activist group led by Hestia, which collectively owns about 7.4% of GME, is seeking to elect two directors, effectively replacing two of the company's nominees. Both Hestia (since 2011) and Permit (2012) are long-term investors in GME, and have been engaging as activists since early 2019. Their early activity includes urging the company to use the $700 million in proceeds from the Spring Mobile sale to buy back stock, and to add some independent directors to the company board.
The parties reached a "cooperation agreement" in late March, 2019, in which the company agreed to appoint a new independent director in consultation with Hestia and Permit. When two directors were appointed the following month, however, the activists claimed that they were "kept out of the selection process".
The communication between activists and the company continued. When GME commenced a tender offer for 13 million shares last July, the activists suggested that GME continue to return capital to shareholders through more aggressive stock repurchases. In March, just before the "Cooperation Agreement" between the activists and GME expired, the company appointed three new directors to the board. The activists then suggested adding "shareholder representatives" to the board, an idea the company rejected.
In a nutshell, that brings us to the current proxy fight, which will be settled at the June 12th shareholder meeting. For its part, GME has lambasted the activists for running a "costly and distracting" proxy fight. All I know is that I've received two calls from the company, and reams of materials, while I've yet to receive anything from the activists and I'm still looking for that proxy card
I've got to admit that proxy fights intrigue me, and I tend to side with the activists, depending on the situation of course. Years ago, when a well-known restaurant chain was in the midst of a proxy fight, an enlightening conversation with a member of the board forever altered my view of proxy fights, right or wrong. It was clear to me that this particular board member was simply trying to save his own skin, along with the compensation he received in his cushy board slot, and really did not care about moving the company forward.
I'm not certain how I will vote yet in this situation, but will say that "shareholder representation" on the board of GME would not be a bad thing.