Burry: How the head of GameStop became the new Buffett and raised the company's value 10-fold

Michael Burry is back in the role of prophet: in a new memo, he describes what GameStop, a video game retailer headed by a man with Warren Buffett's ambitions, could become. Burry believes the retailer is gearing up for a series of aggressive takeovers, and names companies that could become targets.

GameStop's CEO Ryan Cohen announced a few days ago that GameStop is mulling a major deal. His goal is to turn GameStop into a conglomerate worth over $100 billion - that's 10 times its current capitalization. In an interview with CNBC, Cohen said he is looking for a large undervalued asset in the consumer sector, but did not name a specific company.

Burry believes the GameStop director wants to implement Buffett's strategy at Berkshire Hathaway: use a dying asset as a shell for capital formation and large-scale deals. Here's how he describes a hypothetical scenario.

According to Burry, the GameStop retail chain has become a "melting block of ice" - a stagnant business that actually serves as a shell for capital management. The investor is convinced that traditional methods of development will not allow the company to reach its stated capitalization of $100 billion. He believes that it is possible to transform the retailer into an investment holding company only through a series of aggressive deals on the model of private equity funds.

"My first thought is that Ryan is going to go after several different companies at the same time and essentially do a series of leveraged buyouts. He's using the leverage of these companies themselves to bring them into GameStop's orbit," Burry writes. In this model, the focus shifts to finding assets that generate excess cash flow, which the holding company will be able to redistribute to new acquisitions, completely ignoring stagnation in the gaming segment.

The key condition for the launch of this scheme Burry calls the growth of GameStop quotations to the level of $30-35 (it is 16-35% above the current level). At this price, the financial instruments that management has prepared in advance will be used: investors will exchange convertible bonds for shares, and holders of special rights to purchase securities (warrants) will contribute additional funds to the company. As a result, GameStop will receive $6.1 billion in cash without having to take out new loans.

Burry offers a scenario for GameStop's extremely rapid expansion: secretly preparing and simultaneously announcing the purchase of three public companies at once to become the foundation of the conglomerate.

The first step in his scenario is to buy security systems maker ADT for about $8.5 billion. The appeal of this asset, according to Burry, is its stable cash flow from 6 million customers and sleepy management. "GameStop will raise a $5 billion loan secured by ADT's assets and direct those funds to its balance sheet," the investor suggests. In this scheme, the retailer will not only get the cachet to fund the next stages, but also the ability to sell smart home equipment through its stores.

The second step could be the purchase of online retailer Wayfair, which has a capitalization of $13.6 billion. Burry sees this asset not as a furniture store, but as access to a large-scale logistics infrastructure: 2 million square meters of warehouse space and control over last-mile delivery. Burry believes the acquisition will give Cohen the tools to compete directly with Amazon, which is in line with the entrepreneur's ambitions. Burry predicts that Wayfair's operating profit will exceed $1 billion by 2028, which could make the company a financial contributor to the entire holding company.

However, the foundation of the entire structure, according to Burry, should be Assured Guaranty, an insurance company with a capitalization of $4 billion. Burry calls it a "cash cow" that is trading well below its book value.

Such a purchase is a classic Buffett move: the insurance business gives access to a "float" - $11 billion in free insurance reserves that can be reinvested. "It's a nifty trick: new shares are offered at a premium to book value, and the proceeds are used to buy back securities at a discount. This combination increases net asset value per share. Sounds like a technique that would appeal to Ryan's taste," Burry wrote in his memo.

For this plan to come to fruition, unprecedented secret preparations for three takeovers at once are needed, Burry notes.

The plan would require GameStop's board of directors to authorize the issuance of 600 million new shares and $8.5 billion in cash even before the deals are officially announced. The closing of the deals would be strictly sequential: first ADT, then Wayfair and lastly Assured Guaranty, which is critical to ensure incremental funding for each stage.

Burry expects that the effect of the exploding bomb with the support of retail investors will push GameStop quotes to $35 (now they are trading below $26). At the same time, GameStop may send a request to shareholders and regulator SEC to expand the share limit to 1.5 billion shares - this will create the necessary legal and financial reserve to pay for all acquisitions.

Based on his scenario, Burry calculated GameStop's forecast to 2031, taking the growth rate of early Berkshire Hathaway as a base. According to the model, with an annual return on equity of 13%, GameStop's market value would reach $100 billion in five years and its stock price would rise to $94. Two financial levers can be used to realize this projection: aggressive debt repayment of at least $1.5 billion per year and investment of Assured Guaranty's insurance reserves at 7% per annum. The income from this "float" should bring the holding an additional $300 million in net income annually.

This scenario, Burry says, shows a possible unprecedented move in the capital markets and a path to $100 billion in shareholder value. And it fits right in with Cohen's own words, "If it works out, it's brilliant. If it doesn't, well, it will look absolutely, utterly stupid."

"This kind of 'big bang' plan is what I would undertake if I were Ryan, if I wanted to make a trade today. I don't know what Ryan would decide. But he could take a similar approach to any two, three or four companies that seem like a good fit for him and the board," Burry writes.

In search of alternative scenarios, Burry himself studied assets from different sectors that could form the "skeleton" of GameStop's future conglomerate. His list of potential takeover targets included transportation and logistics group Penske Automotive Group, Barbie and other toy manufacturer Mattel, and healthy food supermarket chain Sprouts Farmers Market.

Burry analyzed the insurance sector as well, looking at White Mountains and Kinsale. However, White Mountains recently sold its most promising asset, Bamboo, and Kinsale is now overvalued by the market. Satellite and online radio media company Sirius XM, casino and hotel operators Wynn and MGM were also rejected for the same reason - their business models require excessive capital investment and detract from the chosen ideal.

This article was AI-translated and verified by a human editor