💼 A $35 billion pay package with a big “if”

GameStop finished Wednesday up 3% after the company announced a long-term performance package for Chairman and CEO Ryan Cohen that completely tethers his financial interests with those of shareholders as well as the company’s operational performance.

• Cohen would receive options that enable him to purchase 171.5 million shares of GameStop at $20.66 apiece — but only if the market valuation of the company exceeds certain thresholds and GameStop generates enough cumulative earnings.

• Essentially, Cohen can’t benefit personally from another meme stock surge unless that’s combined with a continued increase in profitability.

• The package is divided into nine tranches, each with a different market cap and cumulative EBITDA hurdle. The first tranche vests if GameStop clears a $20 billion market cap while the company generates $2 billion in EBITDA under his leadership. 

• On a closing basis, GameStop has exceeded this $20 billion threshold only during its 2021 meme stock mania. Because of heavy losses from 2019 through early 2022, it’s taken GameStop a full decade to generate its latest $2 billion in cumulative EBITDA.

Cohen’s key moves as leader of the retailer have been to lean into collectibles, which have seen massive growth, while pursuing an aggressive cost-cutting campaign to improve its financial position. And doing the bitcoin treasury thing.

The Takeaway

At a $100 billion market cap with the current share count, GME’s stock would trade at about $223. That would imply Cohen’s stock options to purchase 171.5 million shares at $20.66 would be worth an eye-watering $34.7 billion. 

But that, unfortunately, is too simple. Because each tranche vests in turn, and because GameStop is offering over a third of its current shares outstanding, we have to take the dilution into account, which would impact all shareholders, Cohen included. With a bit of napkin math, this would mean Cohen’s 171.5 million stock options would be worth closer to $24 billion, provided, of course, that Cohen leads GME to a $100 billion market cap, so slightly bigger than Starbucks is right now.

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It’s official: the sixth time was not the charm for Paramount, as the Warner Bros. Discovery board on Wednesday unanimously, and officially, voted to reject the company’s Larry Ellison-backed offer.

• Paramount’s latest hostile takeover attempt didn’t boost its $30-per-share offer, but did include a $40.4 billion personal guarantee from Larry Ellison, the father of Paramount’s CEO, David Ellison. That update directly addressed the WBD board’s concern that Paramount’s deal being backed by a revocable trust meant it could pull out of the agreement at any time.

• Still, the update wasn’t enough to persuade WBD to recommend the deal over Netflix’s bid.

• Warner Bros.’ board also noted that the company would owe Netflix a $2.8 billion termination fee if it pivoted to Paramount’s deal, along with a $1.5 billion fee for not completing its debt exchange.

Netflix issued a statement in support of the WBD board vote, writing: “Netflix and Warner Bros. will bring together highly complementary strengths and a shared passion for storytelling. By joining forces, we will offer audiences even more of the series and films they love — at home and in theaters — expand opportunities for creators, and help foster a dynamic, competitive, and thriving entertainment industry.”

The Takeaway

Event contracts show increased optimism in Netflix’s likelihood to end up buying WBD, with its odds at 61% as of market close, up from 57% as of 7 a.m. ET yesterday. Event contracts had Netflix’s odds hovering around 40% in the days following Paramount’s renewed bid.

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Quantum computing reaches its Infleqtion point

A new quantum computing company will soon be arriving in public markets. Infleqtion filed its S-4, paving the way for it to go public via a SPAC merger with Churchill Capital Corp X this quarter. Sherwood News Markets Editor Luke Kawa talked with CEO Matthew Kinsella and got the details on its product line, how it’s already integrating AI, and the real-world problems quantum computing solves. 

“Massive opportunity”

• 🏈 College Football: It’s the Fiesta Bowl tonight, but more importantly, the College Football Playoff Semifinal between Miami and Ole Miss. Miami is hot off an upset victory where it defeated No. 2 Ohio State in the Cotton Bowl, while Ole Miss is also coming off a surprise win after beating No. 3 Georgia in the Sugar Bowl. Despite their original seeding, Miami is a solid favorite, with markets* pricing in a 61% chance of victory.

• 🎬 Warner Bros.: On that news that Paramount has been rebuffed for a sixth time, it’s worth considering the possibility of a third contender for the future parent company of Warner Bros. Discovery: nobody. Yes, while Paramount’s chances are still just north of 25% and Netflix’s edge is consistently around 60%, give or take, markets are pricing in about a one-sixth chance that neither deal is tenable and Warner Bros. stays solo.  

• 💸 Ethereum: The line to exit as a validator for ethereum is now empty, while the entrance queue for staking now stands at a waiting period of 25 days, a sign that holders have expectations of higher prices ahead. Prediction markets are pricing in a 69% chance that ethereum will have a positive return this year. 

*Event contracts are offered through Robinhood Derivatives, LLC — probabilities referenced or sourced from KalshiEx LLC or ForecastEx LLC.

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