EBay Rejects GameStop’s $55 Billion Takeover Offer

Online marketplace eBay on Tuesday rejected GameStop’s proposal to combine the two companies in a cash and stock deal worth about $55 billion, calling it “neither credible nor attractive.”

GameStop last week announced its proposal to merge with eBay, a company nearly four times its size. The offer confused much of Wall Street, in part because of questions about how the company could afford it. GameStop CEO Ryan Cohen initially declined to specify how it would finance the deal, and much of Wall Street remains skeptical about the mechanics of the deal.

“EBay has officially rejected its unbiased marriage proposal,” Don Bilson, head of event-driven research at Gordon Haskett, wrote in a research note. “This news should come as no surprise to anyone, as the likelihood of him accepting Gamestop’s cheeky offer was infinitely remote.”

GameStop did not immediately return a request for comment.

In a letter to GameStop, eBay chairman Paul Pressler cited several problems with the offer, after reviewing the offer with legal and financial advisors. Concerns include uncertainty about how it will be paid and the amount of debt the deal would add to the company.

The cornerstone of the deal was a letter GameStop secured from investment bank TD Bank saying it was “very confident” it would raise $20 billion to finance the offering. That non-committal letter said the confidence rested in part on the assumption that the combined company would be investment grade by at least two of the three major credit rating agencies.

Ebay does not believe the new company is investment-grade, according to two people familiar with the deal who spoke on condition of anonymity.

Ratings agency Moody’s called the deal “credit negative” and said it would increase eBay’s debt to $31 billion from $7 billion. Mr. Cohen said he would cut costs by about $2 billion and pay down the company’s debt quickly, but eBay is concerned about the impact of the cost cuts on the company’s revenue.

Last week, Michael Burry, an investor and former hedge fund manager, announced that he had sold all of his shares in GameStop because he was concerned about the amount of debt required for the deal.

GameStop’s Mr. Cohen said eBay shareholders would exchange about half their shares for shares in the combined company, which would most likely give them majority ownership of the new entity. He also said he may seek additional sources of equity capital to pay for the transaction.

GameStop announced on Monday regulatory filing that it wanted to more than double the number of shares it was authorized to issue. This represents a potentially enormous amount of new stock that could fund major acquisitions, among other things, while also diluting GameStop investors’ holdings. In its letter to Mr Cohen on Tuesday, eBay also expressed concern about the extent to which “executive incentives” played a role in the offer. As part of the compensation package that GameStop set up in JanuaryMr. Cohen is waiting to receive billions of dollars in stock if the company exceeds certain thresholds for profits and market value.

Mr. Cohen also said he would be CEO of the combined company. But eBay’s board, which has dealt with several activist investors over the past few years, is questioning whether it would run the company better than current management. In a letter on Tuesday, Mr. Pressler highlighted eBay’s improved performance as it steers a turnaround to better compete with giants such as Amazon. eBay shares are up 55 percent over the past year, while GameStop shares are down 16 percent.

“We have sharpened our strategic focus, strengthened execution, improved our market and dealer experience, and consistently returned capital to shareholders,” Mr. Pressler wrote.

GameStop executives must now decide whether to raise their offer or try to convince eBay shareholders directly, in what is known as a hostile bid. If such an offer received support from 20 percent of eBay shareholders, it could force a special meeting to vote on the deal. That could be challenging given the skepticism the bid has faced so far: eBay stock is trading at about $107 a share, well below the $125 a share GameStop offered the company.

Given their concerns about how the deal would work, “we believe it is quite possible that eBay’s board will reject the sweetened offer unless other issues are resolved,” Morgan Stanley analysts wrote.