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GameStop, Electronics Boutique Merge

19 Apr, 2005 By: John Gaudiosi

There's a new video game retail giant nipping at Wal-Mart's heels.

Specialty video game retailer GameStop will acquire its only direct rival, Electronics Boutique, for $1.5 billion in cash (70 percent) and stock (30 percent). Once complete, the merger will make GameStop the leading global specialty video game retailer, with annual revenue of $3.8 billion from 3,200 stores in the United States and 600 international stores. It will also be a strong No. 2 in the game market at large.

“We estimate that a combined retail presence will have market share in the low 20 percent range, which would make it the No. 2 video game retailer behind Wal-Mart,” said Michael Wallace, video game analyst for UBS. “Strategically, we think this is a great deal.”

Headquartered in Grapevine, Texas, GameStop operates 1,826 retail stores in the United States, Puerto Rico and Ireland. Electronics Boutique owns 2,000 stores in the United States, Canada, Australia, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico and Sweden under the EB Games and Electronics Boutique banners.

GameStop, with $1.84 billion in sales during its last fiscal year, and Electronics Boutique, with $1.98 billion sales during its 2005 fiscal year, each account for 10 percent to 15 percent of new game sales in the United States.

“This merger ... will enable us to enter new international markets and allow us to compete more effectively in the highly competitive U.S. video game industry,” said GameStop chairman and CEO R. Richard Fontaine.

“This transaction makes a tremendous amount of sense from an operational, cultural and synergistic perspective,” said Electronics Boutique CEO Jeffrey Griffiths, who will remain with the new company in an unidentified role.

The post-merger company, which will focus exclusively on the sale of new and used video games, will have an upper hand in reaching the hardcore gamers ages 8 to 34 years of age, whereas Wal-Mart targets the more casual mass market gamer.

The merger also will result in significant cost savings.

“We expect that the combined operations could generate pretax savings of $30 million to $40 million per year,” said Michael Pachter, director of equity research, Wedbush Morgan.

Pachter expects that the Federal Trade Commission will review the proposed merger, since the two retailers have much of the domestic brick-and-mortar used-game market. That market, which allows gamers to trade in old games and systems for in-store credit to purchase new games, has seen rapid growth over the past few years, much to the chagrin of video game publishers. Analysts don't believe the government will block this merger because of used game sales.

Pachter said there are several areas that could contribute to efficiency gains.

For example, the combined entity will be able to consolidate store locations.

“Prior to the merger, each of the companies tried to capture market share from one another, and stores were not always located so as to minimize competition,” he said.

Another advantage, he said, would be more efficient use of co-op advertising dollars.

Also, the two chains will no larger have to compete with one another to chase a sometimes scarce supply of used video games, especially now that the movie rentailers have entered the business. He expects that the combined entity will be more efficient in its purchases of used product from consumers and that gross margins from used game sales will increase.

On the video game publishing front, video game enthusiast magazine Game Informer, which GameStop owns and already has more than 1 million subscribers, will now get an even larger audience with Electronics Boutique store customers.

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