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Blockbuster Says It Wants to Buy Circuit City

Blockbuster said Monday that it was offering up to $1.3 billion for electronics retailer Circuit City Stores, a bid that left some analysts scratching their heads.

A Circuit City store in Mount Laurel, New Jersey.
Mel Evans
A Circuit City store in Mount Laurel, New Jersey.

While Blockbuster touted the proposed combination for its synergies, investors were skeptical about its value, and shares of the video rental chain fell nearly 11 percent.

Meanwhile, Circuit City said Blockbuster had been unable to satisfy concerns that it could finance the bid.

Sanford Bernstein analyst Colin McGranahan called Blockbuster's strategic rationale "vague" and pointed "to the oddness of the combination."

"Strategically the deal appears to us to be a long-odds attempt by Blockbuster to address its deep structural issues; we do not see significant synergies," McGranahan wrote in a research note.

The high end of the offer of $6 to $8 per share is more than double Circuit City's Friday closing price of $3.90, which was down from $18.75 a year ago. On Monday, the shares were up 33 percent at $5.19.

In a news release, Blockbuster touted the idea of the merger of the two struggling retailers as a means to cut costs, exploit the growing convergence of media content and electronic devices, and benefit from selling complementary products.

Circuit City said that while it was open to further talks, it was unwilling to participate in due diligence with Blockbuster .

Blockbuster Chief Executive Jim Keyes said he was confident that his company could complete the transaction. But as of Jan. 6, it only had $184.6 million in cash on its balance sheet, according to its most recent filing.

Keyes said he had discussed the bid with Blockbuster shareholder Carl Icahn and had his support. Turning to the activist shareholder for an "additional equity infusion" is one avenue the company may consider, Keyes added.

Cost savings would come from combining systems and back-office operations, the "rationalization of the companies' real estate" and better deals with vendors, he said.

Combining Forces

Both companies have been struggling against formidable rivals that are changing the nature of their respective marketplaces.

Blockbuster, which has 7,800 stores worldwide where consumers rent movies, has had to modify its business because of new video distribution models -- from rival Netflix Inc to Apple Inc's popular iPod media player.

Meanwhile Circuit City, which is facing a proxy fight against industry investor Mark Wattles, has suffered from an onslaught of competition from Best Buy and other chains, including Wal-Mart Stores.

Blockbuster said it had made the offer in a Feb. 17 letter to Circuit City Chief Executive Philip Schoonover, but decided to go public after the company did not provide access to its books.

Keyes, a former CEO of 7-Eleven, was hired last year with a mandate to turn around the company. He has shifted Blockbuster's emphasis from online and traditional video rentals to in-store sales of DVDs and other media such as video games.

Since taking the helm in July, Keyes has touted the long-term potential in the chain's brick-and-mortar stores and has pulled back on the company's aggressive and costly rivalry with Netflix for the online DVD rental market.

The restructuring has already started to help Blockbuster, which posted a narrower-than-expected loss in the fourth quarter and recently said it expected to be profitable in 2008.

The company said it expected to report a profit of $30 million for the quarter that ended April 6.

Blockbuster bought Movielink.com last year and has said it plans to make movie downloading to televisions available.

The company's shares were down 34 cents, or 10.9 percent, at $2.79 in morning New York Stock Exchange trade.

Circuit City investor Wattles has demanded that the company remove CEO Schoonover immediately and nominated five people for election to the board at this year's annual meeting.

Wattles has said Circuit City not only needed new management but should also focus on overhauling its existing stores and consider selling itself.

Circuit City shares have slumped to multiyear lows in the past year, and the company has replaced more than 3,000 workers with lower-paid employees -- a move that disrupted its business. It posted a quarterly profit last week after a string of losses.

The retailer has said it did not expect year-over-year performance to improve until the second half of its fiscal year, which began on March 1.

For the first quarter, Circuit City expects its pretax loss from continuing operations to widen to $180 million to $195 million from a year earlier.

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