Circuit City To Open Books to Blockbuster

Circuit City Stores Friday reversed course and said it would open its books to suitor Blockbuster and the movie-rental company's largest shareholder, billionaire investor Carl Icahn.

The electronics chain also said Goldman Sachs was assisting it in exploring strategic options, and announced an agreement with investor Mark Wattles that effectively ends a proxy fight ahead of its June annual meeting.  (Video: David Faber discusses Circuit City's future)

Steve Helber / AP A Circuit City store in Richmond, Virginia.

Last month, Blockbuster disclosed that in February it had offered to acquire Circuit City for $6 to $8 a share, or up to $1.3 billion.

Circuit City responded that while it was open to pursuing talks, it was unwilling to let Blockbuster see its books, citing concerns about financing.

On Friday, Circuit City said the movie-rental company had provided additional information that included a letter from Icahn stating that, subject to being satisfied with his due diligence review, the activist investor and/or entities affiliated with him "stand ready" to purchase Circuit City if Blockbuster were unable to arrange financing.

The Richmond, Virginia-based Circuit City, which became the focus of takeover talks as its results weakened in the past year, said the decision to open its books "should not be taken as an indication" that it has completed its review of the Blockbuster bid or settled upon a specific course of action.

Deal or No Deal?

Analysts were mixed on whether the latest news signaled a likely sale of Circuit City.

Blockbuster's bid has drawn criticism from analysts who questioned the strategic fit of the two companies and how the deal would be financed.

"The fact that Circuit City reversed its position might be an indication that trends have continued to deteriorate, which might have put incremental pressure on the board to avail the company to alternatives," Lehman Brothers analyst Michael Lasser wrote in a research note.

But he added that Icahn's willingness to finance the deal, and the threat of possible legal action, could have also prompted the change of heart.

Still, Lasser expressed doubt that Circuit City would be sold, saying poor locations, cost structure and competitive standing would be difficult to overcome.

Richard Weinhart, an analyst with BMO Capital Markets, wrote in a research note, "We continue to believe deteriorating results could be a barrier to any deal getting done, although the odds look less likely given Blockbuster's management's determination."

Weinhart also said a deal could materialize as Wattles' nominees to the Circuit City board are likely to back a sale.

Circuit City said Friday that it would select three director nominees put forth by Wattles Capital Management and include them as board candidates at its 2008 annual meeting.

As part of that agreement, Wattles Capital agreed to drop its proxy fight. The firm, which owns 6.5 percent of Circuit City's stock, had nominated five people to the Circuit City board and called for the ouster of Chief Executive Philip Schoonover.

Circuit City shares were up 40 cents to $5.19 in morning trade on the New York Stock Exchange. The shares have risen 5 percent since Blockbuster made its buyout interest public on April 14, but have fallen 68 percent in the past year.

Blockbuster shares were down 1 cent to $2.67, also on the NYSE.

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