A Game of two halves

Game Group, the UK's largest specialist video game retail chain was one of the great success stories of the growing digital economy of the past two decades. The story of the company's rise from a minority player in an overlooked market to a behemoth turning over nearly £2 billion at its peak in 2009 is only topped by the meteoric rate at which it fell into financial non-viability.

What goes up...

Formed in 1991 as Rhino Group, original owners Bev Ripley and Terry Norris opened stores branded as Future Zone in locations across the country, expanding their empire further with the acquisitions of WH Smith's Virgin Games subsidiary. The stores went through several name changes, becoming Electronics Boutique briefly before buying out a smaller retail chain called Game and re-branding their entire growing estate in UK and Ireland.

Game, as it was now known, took its first steps outside the UK with the opening of a location in Stockholm in 1998, but the new millennium saw increased focus on expansion, with the buyout of Centromail in Spain and Scoregames in France. In 2007, the group picked up one of its few remaining rivals in the UK market, Gamestation, taking its portfolio of properties to more than 1,000 worldwide. Helped along by smash hits such as Halo 3, Super Mario Galaxy and the multi-million selling Call of Duty: Modern Warfare, results for that financial year (07-08), saw turnover above £1 billion for the first time, while profits more than doubled to £68.4 million.

While Game may have been undeniably successful, some critics were unhappy with how the company treated both their customers and their staff. In the words of former Game employee and games writer Ken Barnes:

"What mattered (and still matters) was... that the Key Performance Indicators were met. Nobody cared about how best to actually achieve those targets, or how being the best choice for gamers or – heaven forbid – going beyond the call of duty for the customers, would actually make those targets a lot easier to achieve."

While the gaming retail market continued to expand, the critical voices were easy to ignore. But when several events combined to shake the status quo, doubts about the company's future began to emerge.

...must come down

The first hints of trouble came soon after Christmas this year, with poor sales over the holiday period throwing a spanner into the works of a highly leveraged company with commitments to lenders reportedly in the tens of millions of pounds. With lending institutions still wary of risky propositions after the financial crisis, the drop in sales was sufficient to decrease the value of the group's stock by more than a quarter in only a few hours' trading.

Company spokespeople were clear that debt service conditions would be met, but it was a humbling blow for a market that had considered itself recession-proof.

The next indication of serious issues affecting the company came at the end of February, when the company confirmed that it would not be stocking copies of one of the year's most hotly anticipated titles, Mass Effect 3. Further enquiries found that two of the company's biggest suppliers, distributors EA and Nintendo, were withholding stock from the chain. The shock announcement caused further turmoil in the markets, with shares dropping again amid analyst estimates that failing to stock Mass Effect 3 could have cost Game more than £6 million in lost revenue.

The group remained upbeat however, with statements claiming that it "remains in discussions with its suppliers and lenders in relation to terms of trade that allow the business to operate" and "the board of Game is working actively to resolve these issues as quickly as possible." However, early March saw the beginning of deep price cuts on pre-owned stock, as the stock price hit a new low of less than 1p per share.

The situation was clearly dire for the company, and it came as little surprise to industry-watchers when the board called a halt to trading in the company's shares on 21 March. According to a statement sent to the press, negotiations with lenders had stalled:

"Discussions with all stakeholders and other parties have not made sufficient progress in the time available to offer a realistic prospect for a solvent solution for the business," the statement read. "The board has therefore today filed a notice of intention to appoint an administrator."

In the short term, this was a good thing, invoking statutory protection against sudden withdrawal of financing while allowing the group's stores to continue trading. Five days later, a second communiqué revealed that accountants PricewaterhouseCoopers (PwC) had been approved as the administrator, with overall responsibility for ensuring the maximum of return for creditors on their outstanding investments.

The first move of the administrators was to shut down a significant number of stores across the UK and Ireland, with the loss of more than 2,000 jobs. This included the chain's flagship Birmingham store, a symbolic loss than summed up the dire financial position it now found itself in. Rumours abounded of possible takeover bids from European rivals and US giant GameStop, while the bad news was compounded by protests from Irish staff over redundancy awards.

The situation was rapidly approaching crisis point, with the real possibility of Game exiting the British high street permanently. The jobs of thousands of employees, as well as the potential for losses in the millions for lenders, hung on the outcome of complex negotiations with potential buyers.

Back from the brink

It was clear that an extraordinary intervention was required to save the ailing chain. It is lucky then that OpCapita, an investment partnership best known for its ownership of the retail electronics company Comet, specialises in bringing troubled firms back from the abyss.

For the princely sum of £1, the investment advisor has picked up the remaining 333 UK stores, and agreed to take on debts of £85 million and 3,200 staff. The assets will be held by an entity called Baker Acquisitions, a firm described as "advised by OpCapita".

The plan is to run the business as a going concern, according to OpCapita managing partner Henry Jackson, who said: "We strongly believe there is a place on the high street for a video gaming specialist, and Game is the leading brand in a £2.8 billion market in the UK."

According to PwC, the company plans to announce no further store closures, which will no doubt come as a relief to staff at the remaining branches. The company also plans to re-employ some workers from GAME's head office, who had previously been made redundant.

The new owners have appointed David Hamid, former COO of Dixons and CEO of Halfords, as executive chairman of Game. Hamid is also an operating partner with OpCapita.

Hamid faces a difficult job in turning around a business which is often seen as out-of-touch with its customers, and still burdened with debts. In the short term, having closed many presumably loss-making stores and laid off many staff, the company may be better placed to meet its commitments. However, in the long run Game will have to revisit its business model in the face of a market which is trending more towards digital forms of distribution, and in which retail outlets may prove to be more of a hindrance than a strength.

Outside the UK, the fate of more around 600 stores lies in the balance. The OpCapita deal secures the future of only those shops on the mainland UK, while making no mention of the remaining locations in Europe and Australia. PwC will undoubtedly attempt to make similar deals with rivals operating in those markets, although without the draw of the UK estate, it may prove difficult to keep the chain together. What seems most likely is that each country's assets will be broken up and sold off piecemeal, with the brand itself falling into disuse.

One thing is clear however: while a massive player may have been humbled, the video games market is still a prize worth fighting for.

Copyright © 2012 IDG Communications, Inc.

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