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Can You Trust Game Digital After Previous Mistakes?

GameGame Digital, the UK’s leading games retailer, which collapsed into administration two years ago, has confirmed that it is planning to make a return to the market after a hefty restructuring programme. 

Game collapsed during 2012, becoming one of the most high-profile casualties of the UK high street. The group was struggling to find funds to pay the rent and several main suppliers, including Electronic Arts and Nintendo, refused to provide key titles.

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At the time, Game’s management claimed that there was, “no equity value left in the group” and shareholders were left with nothing, as the group fell into the hands of administrators.

However, private investment firm OpCapita, backed by Elliott Advisors, the aggressive US hedge fund, swooped in and bought the group out of administration.

Now, Elliot is planning to bring Game back to the market, but can Game be trusted not to let down shareholders once again?

Coming back

Game has been working flat out to restructure and return to health since its administration. The company has closed more than half of its stores and slashed staffing numbers, a new management team has also been brought in. 

Further, if the float goes ahead, Game will be debt-free, when the group originally collapsed, it was struggling to support debts of around £40m. 

Game reported adjusted earnings before interest, tax, depreciation and amortisation of £51m on revenues of £586m for the six months to January 2014. So, full-year revenues and EBITDA should be somewhere within the region of £102m and £1.2bn for 2014. 

It is expected that when Game comes to market the initial valuation will be somewhere in the region of £400m, putting the group just outside of the FTSE 250. 

Can it be trusted?

The return of Game Group is likely to bring back bad memories for many private investors who saw they equity in the group wiped out during 2012.

What’s more, investor confidence in retail IPOs is flagging as new issues have all underperformed and the market is questioning sky-high valuations. 

For example, recent issues Just Eat (LSE: JE)Pets at Home Group (LSE: PETS) and Boohoo.Com (LSE: BOO) are all languishing below their listing prices.

Pets at Home has seen its shares fall 12.5% since coming to the market, although management made an 18-fold gain on their shares acquired just before the company went public.  

Meanwhile, Boohoo’s shares jumped 70% on their market debut after the company revealed a 62% jump in sales. However, Boohoo’s share have since fallen 42% below their listing price and the company’s current market capitalisation of around £500m, dwarfs its annual pre-tax profit of £3.2m; a P/E ratio of 156. 

Further, Just Eat’s shares have fallen nearly 30% from their IPO price. The company’s shares have notched up these declines despite the fact that Goldman Sachs has estimated that the company can drive profits higher by 60% per annum during the next few years.

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Rupert does not own any share mentioned within this article.