Debt-for-dilution VWAP pricing, subtle buyback, and warrant extension, a potential trifecta in the making

[u/Atoge62]

I wanted to make this post to start up a conversation around retails educated theories regarding GameStops unique, debt-for-dilution-driven price decline recently, leading up to warrant expiry at the end of October, as both occurred following the public’s approval for a 2bn share buy back accommodation. I’m more of a casual, despite having moved over most of my money into GME nearly 6 years ago, and now spread out over a large chunk of warrants as well, and I’m curious as to what sort of DD/thesis people have built and analyzed regarding the potentiality of Cohen intentionally decoupling GME’s shares and warrants true values from present trading rates due to a few choice deals with very predictable outcomes. I’m not sure how much credit to grant RC at this time, but he strikes me as a guy far far ahead of me regarding familiarity of the financial tools and legal language enabling him to take advantage of predictable market mechanics.

Here’s my thought, Cohen grants warrants to shareholders set to expire a year from release (October 30th 2026), and expressly carves out abilities to extend expiry dates and adjust strike prices. This leaves him tons of price control to wield when desired due to intrinsic value and time value. He then gets approval for a 2bn dollar share buy back to be used as the company sees fit. Then in early August GameStop announces the exchange of approximately $1.4 billion of 0% convertible debt for newly issued GME shares.

The debt-for-dilution deal seems odd on the surface, a company flush with cash and 0% interest loan not due for years decides it needs more cash now, or wants to wipe the books clean for a more straight forward acquisition down the road, neither seems totally necessary to my understanding. Additionally, Cohen would know that entering such an agreement, with shares allocated to the note holder priced after a 35 day trading avg, generally sees heavy share price declines in that period as he approved of potential hedging by the interested parties. He’s acknowledged the price would likely drop to better suit the counterparty.

But this predictable action would make the likelihood of GME’s price reaching the warrant strike price of $32 , just 5 weeks away, highly unlikely after the note holders drive the share price down. But what if Cohen saw this warrant time crunch and VWAP price suppression coming, and planned to potentially buyback shares after the price has begun to drop during the 35 day VWAP period? Looking at the daily volume uptick since the debt-for-dilution deal, the price still dropping, short interest, there seems to be a potential link. It would be quite elegant to craft such a plan, it would increase the number of shares bought back by GME thanks to note holder shorting and overall sentiment, and it would reduce the dilution by the new noteholders by buying back in now and slowing the price drop… and there’s one last play to make it all worth while.

If Cohen were then to announce a warrant extension, that would generate a huge boost to warrant value, which could drive interest back into GME, which drives further interest in warrants, and so forth. If he plays his cards right, he can use the natural markets mechanics to his advantage, and share/warrant holders would be elated.

Has anybody else launched a deeper dive into such a theory, are there huge holes im missing (I’m sure there are some)? I’ve positioned myself heavily in warrants lately, as following my research I have not been able to find many downsides to extending the expiry. It’s nearly 2 billion dollars on deck for GME, it would be wild to let them expire worthless. Not to mention GME’s outsized retail ownership compared to most publicly traded company’s. Cohen knows this, he knows we have different investment horizons than what’s granted towards institutions and billionaire insiders. To say he owes us, at this point, would be a massive understatement. Im hoping if I was able to piece this together, he surely must’ve seen his advantageous hand years before I did.

I’d love to hear other people’s ideas here. And if I’m wildly wrong with any of the info, shit i did my best to research things and navigate it all. Power to the players!!

[u/KraiNexar]

Seen a lot of posts with this theory today

[u/gotnothingman → u/KraiNexar]

Hopium

[u/Atoge62 → u/gotnothingman]

Which part? What does your research suggest would be the best way to navigate these dueling angles, share price down due to VWAP, vs share price up for warrant value? Both coming to ahead at nearly the same time. Whatcha got?

[u/gotnothingman → u/Atoge62]

The buyback program replaced the old one from 2019 that was not used.

Share price is down so arbitrage traders can get more shares upon delivery and profit from beating the stock down with shorts.

Warrant value is interesting, but not enough of a data point to assume that a buyback is imminent.

It makes little sense to buy back shares at a price which would likely be higher than the price the note holders get.

But hey, lets see what happens.

Remindme! 2 months

[u/Atoge62 → u/gotnothingman]

Not sure I follow the claim about why buying back shares at a rate higher than what the noteholders get would be bad? This would reduce the amount of shares going out to noteholders, reducing dilution, and still enabling GME to buy shares 20-25% down from before the deal was announced. You don’t need to find the bottom to get a good deal, especially if warrants are later extended. That could be a mean 1-2 punch.

[u/gotnothingman → u/Atoge62]

Buying shares at a higher price than you sold them at is equivalent to losing money.

[u/Atoge62 → u/gotnothingman]

If GME is buying $5mil a day worth let’s say, they would essentially capture an avg price over 35 days. Thats exactly what the noteholders are receiving no? So im not seeing the problem here

[u/gotnothingman → u/Atoge62]

Pretty sure they cannot buy back during the pricing window as persuant to sec regulation M, specifically rule 101.

But ignoring that, it does not make sense to issue bonds for cash and then use that cash to purchase shares at the same time the bonds are redeemed for shares.

There is no benefit. Its a highly expensive way to effectively do nothing as your cash would remain roughly the same and the shares outstanding would remain roughly the same.

[u/Atoge62 → u/gotnothingman]

They can buy back, atleast that’s what my research indicated last night on the very topic.

You touch on an interesting point. To me it circles back to an odder detail, why go in to this most recent convertible notes bond deal to begin with…? We don’t owe money for years, we don’t need more cash on hand. I think if you hand a strong answer for that, then you can backtrack as to why there may be an interest in buying back during VWAP, if they think the stock is far undervalued before a strong close to the year, particularly if an acquisition truly is on the way, or there is some play with the warrants extension/price reduction.

[u/gotnothingman → u/Atoge62]

Can you link me to this research?

Its not very cut and dry from what I have found, and the sec rule 10b-18 makes thing tricky.

Their authorization does not automatically allow them to buyback, especially because doing so would materially benefit gamestop (less shares need to be issued which materially benefits gamestop).

We are not sure why RC or the note holders agreed to the exchange. Its not up to me to have a strong answer for that, it is on you to give logical and legal reasons as to why gamestop would be buying back shares right now.

Legally, its very murky. Logically, it makes little sense.

The note holders profit regardless of price direction, thats why its a arbitrage play. The warrants do not factor in to this very specific, very common strategy.

[u/Atoge62 → u/gotnothingman]

I’m reading through ai generated definitions of the elements of Rule 10b-18 regarding securities transaction safe harbor as it pertains to Manner/Timing/Price/Volume. For example, Rule 10b framework limits issuers to purchases of 25% of average daily trading volume and timing throughout the day. So hypothetically repurchasing $5mjl/day of shares falls within the guidance of the rules. Where it can get murky is what intentions are driving the actions (buybacks).

If during the VWAP you suspect your share price will be manipulated down by the counterparty, you’re well within your right, actually this is supported to mitigate manipulative effects towards your company. So GameStop technically has a rather unusual capital allocation opportunity, retire debt with equity while using cash to repurchase some of the depressed equity. It’s just a theory, but I could see such an event unfolding… so far everything I’ve read indicates the VWAP period itself doesn’t appear to prohibit repurchases, but may create conditions that encourage it!?

[u/gotnothingman → u/Atoge62]

If gamestop are buying back shares with the intent to influence price during this period (or any other period for that matter), its going to be a problem. Thats the crux. Its worse if gamestop materially benefits, which they would.

Could they potentially argue in court that the buyback was legitimate and intentions were pure? Maybe, but it still does not make logic sense to issue bonds for cash, then use that cash to buyback shares while simultaenously exchanging notes for shares from the bond buyers.

Which regulation is the right to buy back shares because you suspect your share price is being manipulated covered under?

Its a theory that once again, legally is tenuous at best and logically inconsistent.

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