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(Bloomberg) -- GameStop Corp. shares slumped as investors responded to the company’s plans to load up on debt in order to buy Bitcoin.
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The video-game retailer erased a quarter of its value on Thursday, shedding $3 billion in market capitalization in its largest drop since last June. The rout came after the company, on Wednesday afternoon, announced plans to sell $1.3 billion in convertible bonds to fund Bitcoin purchases as it embraces a strategy that was developed by the cryptocurrency advocate Michael Saylor.
When the company made an initial announcement about its Bitcoin strategy on Tuesday afternoon, it sparked a rally in the shares, that brought the stock up by the time the markets closed on Wednesday. But the additional information about the bond sale soured the sentiment around the stock. The stock was down 25% on Thursday to $21.36 at 1:47 p.m. in New York.
Companies marketing large convertible debt sales tend to face short-term selling pressure. These bonds are popular with hedge funds that use them for a particular arbitrage strategy that capitalizes on the volatility of the underlying stock. In order to employ this strategy, the hedge funds have to short the shares of the company.
The Grapevine, Texas-based GameStop joins a growing list of public companies taking on convertible debt to buy Bitcoin in an attempt to capitalize on upswings in the cryptocurrency. The tactic was pioneered by Saylor’s Strategy, the enterprise software company formally known as MicroStrategy, which has acquired more than $40 billion in Bitcoin and seen its share price soar.
A convertible bond is a hybrid instrument that allows the holder to convert the bond into a predetermined number of shares if the stock rises above a certain level. GameStop is marketing its notes, which are due in 2030, with a 35% to 40% conversion premium, according to people familiar with the deal who asked not to be identified because the information is private. The premium determines the price at which the conversion happens.
GameStop’s entry into the market comes even as investors appear to be growing more skeptical of the strategy. The premium that GameStop is looking to offer on its bonds is less than the roughly 55% premium on a similar issue from Strategy in November. More recently, Strategy made a $2 billion sale in February that offered investors a more advantageous 35% premium. That along, with the terms on a growing slate of debt-like instruments offered by Strategy, suggest that investors are demanding more from the company.