Johnny Minkley 14:30 (BST)
18/07/2006

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It is the rumour that just will not die down - and top US analyst Wedbush Morgan has poured more fuel on the fire asserting its belief that US giant GameStop will complete a USD 70m swoop for Blockbuster-owned UK chain Gamestation by the end of the year.

The future of Gamestation, the UK's second largest specialist games retailer after GAME, has been repeatedly questioned since struggling parent firm Blockbuster announced its intention to sell-off 'non-core' assets last year. And following Gamestop's successful merger with US rival Electronics Boutique last October, the world's biggest games retailer has been hotly tipped to make a powerful push into the lucrative UK marker, with senior Wedbush analyst Michael Pachter viewing the acquisition of Gamestation as the ideal springboard for its ambitions.

"On the horizon, we believe that GameStop is the most likely buyer of Blockbuster's Gamestation business in the UK, representing approximately 200 stores," said Pachter. "GameStop has a limited presence in the UK (only around 25 stores in Ireland), and has the potential to open as many as 1,000 stores in this territory over the next several years. We believe that Blockbuster is motivated to sell its Gamestation stores, and think that the company would consider selling the stores for around 50 per cent of sales, or around an estimated USD 70 million."

Pachter added: "We think that Blockbuster is committed to selling its Gamestation stores before year-end, and think that it makes eminent sense for GameStop to close any potential acquisition ahead of the key holiday selling season. As we believe that it is in both companies' best interests to close a transaction before the holidays, and think that this transaction makes sense for both parties, we expect to see a transaction during the October quarter."

GameStop, which has a 22 per cent market share in the US, boasts a worldwide store count in excess of 4,400, with around 400 in Europe spread across territories including Ireland, Italy, Denmark, Finland, Germany, Italy, Spain, Sweden and Switzerland. And Europe is set to prove the near-term focus for the retailer's aggressive expansion plans, fuelled by the appointment earlier this year of a dedicated Euro VP, Niall Lawlor, based in Sweden.

The firm opened its first mainland UK store in Birmingham, England in April 2005, a second in Stockport, England opening later in the year. Growth in the fiercely competitive UK market is likely to be a major target for the US retailer, and analysts believe the acquisition of an existing chain is the easiest way for GameStop to gain a foothold in the territory.

"In our view, should GameStop weigh the merits of a 'build vs.buy' analysis, it would decide to purchase the Gamestation stores for USD 70 million rather than build out new stores for USD 125,000-200,000 apiece and incur negative operating leverage while its new stores mature," Pachter argued. "By purchasing the Gamestation assets, GameStop could eliminate a key rival and immediately jump start sales in the UK, allowing it to grow EPS [earnings per share] almost immediately."

A spokesperson for Gamestation said: "We do not comment on rumour and speculation."

Reporting on GameStop's expected performance for its Q2 ending July, Wedbush Morgan changed its investor rating from 'buy' to 'strong buy', predicting the US outfit will publish results above guidance and consensus estimates, based on higher than expected hardware and software sales in the US during May and June.