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AMC Hints at GameStop Partnership. Should You Buy Their Stocks?

Would AMC Entertainment Holdings (NYSE: AMC) partnering with GameStop (NYSE: GME) really result in a worthwhile collaboration that could make either company a buy? Or is it just a bit of fan service that won't go anywhere?

On the surface, the idea of two failing businesses joining forces and somehow coming out stronger seems far-fetched. Both companies are in decline, and had it not been for the meme stock trading frenzy that gripped their shares, both would likely be a lot closer to bankruptcy at this moment.

Still, scratch a little deeper and an argument can be made that both companies might benefit from synergies derived from working together.

Image source: Getty Images.

Ready, set, wait

Investors were teased with this idea last month when CEO Adam Aron of AMC told analysts that partnering with GameStop was one of the most-asked questions he receives from shareholders. He wanted them to know he was "on the case," even though he had yet to actually reach out to GameStop CEO Matt Furlong or chairman Ryan Cohen.

But Aron has apparently taken action since. He told the Fox Business Network's Liz Claman during a recent interview that AMC contacted the video game retailer about a partnership, talks are ongoing, but it was too early to go into specifics on what a collaboration would look like.

BREAKING:

Aron to : We have made contact with on a partnership, we're not ready to say what it is." says AMC now playing offense to get folks back to the theatres w/epic $25M ad spend

— Liz Claman (@LizClaman)

But what would a partnership look like?

Gamers cheering during a competition. Image source: Getty Images.

Taking esports to the big screen

The most natural fit would seem to be streaming gaming tournaments in theaters. It's something AMC has experience in through Fathom Events, a company it owns a one-third stake in. Fathom streams alternative entertainment onto big screens, such as Metropolitan Opera performances, sporting events, and comedy shows. Aron sees it extending to other areas, including video gaming events.

He said during AMC's earnings conference call: "But I think there's a real opportunity here and we're going to chase it, the same with sports, the same with gaming. There's really a possibility here to find a new source of revenue that AMC has not tapped before."

With GameStop also changing direction to become an increasingly digitally native brand, and one that is immersing itself in the rapidly growing esports space, the idea of a theater providing a venue for viewing these events has merit. It's the execution of the concept that could be difficult.

Watching video games being played on the big screen might not be as conducive to enjoyment as watching it in more-intimate settings, such as on a computer or on a big-screen TV, where they're more commonly enjoyed when it's not a live and in-person event.

Moreover, we still haven't escaped the restrictions the pandemic has imposed on our daily activities, including going to the theater and competitive game play. Movie theaters might not be the kind of venue to provide sufficient capacity to make it attractive to players, viewers, or AMC and GameStop themselves.

Image source: Getty Images.

GameStop is going slow

GameStop is also much more guarded about its plans than AMC, which has fully embraced its meme stock status and openly courts the WallStreetBets crowd. Even during its earnings conference call, GameStop didn't take any questions.

This effort is being directed by AMC, and that could be telling, because it is in a far more precarious financial position than GameStop, meaning it might be more willing to throw outlandish ideas at the wall to see if they stick.

The video game retailer has paid down virtually all of its debt, has a substantial cash horde, and might not be as willing to go off on larks as Aron is. AMC, on the other hand, while it has $2 billion in liquidity available, is also carrying $5.6 billion in debt.

As my Motley Fool colleague Sean Williams recently pointed out, AMC also has billions of dollars in lease payments and other obligations coming due that could be difficult to pay.

Game over?

I won't completely dismiss an AMC-GameStop partnership as having some value. It might even be successful if it comes to fruition.

The problem is that it's not likely to happen soon, so it won't help either company out of its current predicament. That means investors shouldn't consider it a reason to buy either stock.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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