GameStop has a market value of less than $12 billion and just bid $55 billion for eBay. The math is what pushed Michael Burry out.
The "Big Short" investor said Monday on Substack that he sold his entire GameStop stake. He says there is too much debt to make the deal work.
Burry had been holding GameStop on a thesis he called "Instant Berkshire." The idea was that CEO Ryan Cohen could buy steady firms and turn GameStop into a tiny version of Berkshire Hathaway.
The eBay bid broke that thesis fast. By Burry's count, the deal would push leverage to about 7.7 times debt to EBITDA. EBITDA is a rough measure of yearly cash flow used to check if a firm can pay its loans.
Anything above 5 times was always a deal-breaker for him. "Never confuse debt for creativity," Burry posted on Substack.
The post was the first sale Burry has flagged since starting his Substack, which makes the timing notable for investors who follow his moves.
GameStop has a $20 billion financing letter from TD Bank to cover the cash half of the deal. The other half would come from new GameStop stock.
That still leaves a wide gap between what GameStop has lined up and what eBay is worth at the bid price. CEO Ryan Cohen told CNBC the firm has the room to issue more stock to close the deal, but he didn't lay out a full plan.
GameStop's entire market cap sits at less than $12 billion, which is smaller than the financing letter alone. That's like a person making $50,000 a year asking the bank for a $250,000 loan to buy a $200,000 house.
Burry pointed to Wayfair, Carvana, and Bath & Body Works as firms that lived through similar debt loads. He calls them the lucky few.
eBay confirmed Monday that it got the offer and said its board will review it. GameStop stock dropped roughly 10% on the news.
The deal is unsolicited and nonbinding, which means eBay can still walk. A $55 billion bid is a step change for a firm that mostly sells used video games and collectibles.
eBay shares fell about 3.3% on the day, which suggests the market doesn't fully expect the deal to close. Investors will be watching whether eBay's board engages, walks, or finds a counterbidder.
For Burry, the trade is closed. The bull case ended the moment the leverage math hit his screen.
