GameStop/EB deal has Street smacking its lips

Financial analysts tracking the fortunes of specialty game retailers GameStop and Electronics Boutique offered their views on the merger of the two retailers.

The two companies announced this morning that they would be merging, though, technically, GameStop is taking over EB. Despite the consolidation of the two largest specialty game retailers, analysts remain optimistic that the deal will be approved by antitrust regulators.

"[These two companies] combined control only 21 to 22 percent of the total US video game market," said Gary Cooper, analyst at Banc America Securities, "[That] is about the same as Wal-Mart, the current market share leader."

Other analysts echoed this sentiment and called out the potential threat the new entity will someday likely pose to Wal-Mart.

"We estimate that a combined retail presence will have market share in the low 20 percent range, which would make it the number two video game retailer behind Wal-Mart," writes Michael Wallace, analyst with investment firm UBS. "Strategically, we think this is a great deal."

While shares of both companies rose as news of the merger hit the markets (EB shares were up $14.09 to $55.21, while GameStop charted a $2.10 climb to $23.71), most analysts see Electronics Boutique shareholders as the ones with the most to gain from the deal.

"It's a great deal for ELBO shareholders," says C.L. King and Associates analyst William Armstrong. "They get a huge premium after the stock already had a huge run last year."

P.J. McNealy, an analyst with American Technology Research, says that publishers will also benefit from the merger. "Looking further out into the next-generation of consoles, having a unified, solid video game specialty retailer," says McNealy, "could benefit the video game software publishers simply because they will be able to tailor to the early adopter, hardcore crowd."

Harris Nesbitt analyst Edward Williams agrees. He writes that "the new, larger company should have a significantly stronger position in the video game retail marketplace, especially as the new console hardware systems launch later this year."

Michael Pachter and Edward Woo of Wedbush Morgan Securities see a potential for enormous savings in the new company. "We expect the combined entity to rationalize its assets and to eliminate a significant amount of overhead," wrote the Wedbush analysts in a research note to investors today.

"We expect that the combined operations could generate pretax savings of $30–40 million per year, based on $20 million reduction of general overhead and $10–20 million in store rationalization (100 stores at $100,000–200,000 per store net savings) or around an additional .25–.33 cents per share after-tax annually. Thus, we expect the merger to be significantly accretive once completed."

Anthony Gikas and Stephanie Wissink, analysts with Piper Jaffray, see this new retailer as a great investment opportunity in the next few years. They project that video game software sales will increase nearly 10 percent during 2006 and between 15 to 25 percent during 2007. "We think the new GameStop will be very well positioned to take advantage of strong growth during this period."