SunTrust Comments On GameStop's Geeknet Acquisition, Notes Positive Takeaways Despite Small Nature Of Deal

In a report published Tuesday, SunTrust Robinson Humphrey analyst David Magee commented on GameStop Corp. (NYSE: GME)'s $20 per share acquisition offer for Geeknet Inc (NASDAQ: GKNT).

Geeknet is an online retailer of apparel, home/office décor, electronics/gadgets and other forms of collectibles with a science fiction theme. GameStop's acquisition offer represented $140 million valuation for the company.

Magee said that GameStop's acquisition offer represents about 1 percent of his 2015 revenue estimates. Despite the small size of the deal, the analyst noted several positives can be found within the deal.

First, the acquisition better diversifies GameStop's revenue stream (online channel), but also extends its exposure to the fast-growing collectibles category which is estimated at a $20 billion global market. Second, GameStop's management noted that the acquisition will be accretive as soon as this year.

By joining forces with GameStop's already existing infrastructure, the new segment can see its EBIT margins "significantly" improve. In addition, the acquisition is consistent with management's commentary issued during its recent conference call that it wants to boost its collectibles business to $500 million beyond 2015.

Shares of GameStop remain Buy rated with an unchanged $50 price target. The analyst pointed out the "relative inexpensive valuation" (5x his 2015 EV/EBITDA estimate, a 40 percent discount to the peer group average of 9x). The analyst also made no changes to his fiscal 2015 earnings per share estimate ($3.90) and 2016 earnings per share estimate ($4.40) but will revisit the figures when the deal closes which is expected by the end of the second quarter 2015.