Circuit City gets unsolicited bidder
Promising a “game-changing retail concept,” Blockbuster Inc. told Circuit City Stores Inc. shareholders Monday that it would pay just under a 50% premium for their shares in a $1.35-billion bid for the consumer electronics chain.
Circuit City stock shot up on the news and Blockbuster’s fell to a 52-week low before recovering slightly.
The video-rental chain said the acquisition would create an $18-billion enterprise with thousands of stores that would rent videos and games and sell portable electronics in the same space.
Blockbuster Chief Executive James W. Keyes said the offer was “simply too attractive to ignore” and that combining the two companies would create a new kind of retail environment “with a sustainable competitive advantage.”
The offer of $6 to $8 a share is nearly double Circuit City’s closing price Monday of $4.97, which was up 27% from $3.90 on Friday.
For its part, Circuit City said it was unconvinced that Blockbuster -- whose market capitalization is $515.9 million compared with Circuit City’s $836.8 million, could afford the deal -- even though billionaire investor Carl Icahn, a Blockbuster board member, might help finance it. Blockbuster’s most recent filing with federal regulators said the company had $184.6 million in cash as of Jan. 6.
Circuit City’s board advised shareholders to hold off on making any decision until the board reviewed the proposal, which was originally sent to Circuit City CEO Philip Schoonover in a Feb. 17 letter. Circuit City refused to give Blockbuster access to its financial records, one reason Blockbuster cited for making its offer public.
By combining marketing and sales systems and back-office operations, reconfiguring real estate holdings and working out better deals with vendors, the acquisition would help both companies save money, Keyes said.
Circuit City has been struggling. Stuck in the No. 2 spot behind Best Buy Co., the Richmond, Va.-based chain swung to a quarterly profit -- its first in more than a year -- in its fiscal fourth quarter, which ended Feb. 29. The company had cut costs, slashed its tech-service program and replaced with lower-paid workers 3,400 retail employees it had laid off.
Blockbuster seems to be on an upswing. The Dallas-based company’s fiscal fourth quarter profit more than quadrupled and it expects to post $30 million in net income for the first quarter, compared with a net loss of $49 million in the same quarter last year.
Keyes, a former CEO of 7-Eleven Inc. who took the Blockbuster reins in July, has modified Blockbuster’s online video rental plan by raising membership prices and has boosted inventory in stores.
Last year Blockbuster purchased Movielink, a digital movie-downloading system. Some analysts said the chain had done a good job meeting the challenges from mail-and-online rental firm Netflix Inc., retailers such as Wal-Mart Stores Inc. and cable and satellite TV operators.
But few analysts applauded Blockbuster’s proposal.
In a note to investors, three Credit Suisse analysts said there seemed to be little to gain by “combining a poorly positioned large store chain with a poorly positioned smaller store chain.” Michael Pachter, an analyst with Wedbush Morgan Securities, said he was perplexed that Blockbuster would want to buy a company that appeared to “be in the middle of a death spiral.”
“It’s very much out of left field, even though I don’t at all question the sincerity of Blockbuster management or the need for some kind of change at Circuit City,” Pachter said. “But it’s odd that they feel so compelled to do this now.”
James McQuivey, principal analyst with Forrester Research Inc., said buying Circuit City wouldn’t necessarily address the “real problem,” which is keeping Blockbuster relevant as a retail movie-rental company.
Some analysts said Blockbuster’s recovery could falter if it made the Circuit City buy and took on debt to acquire it. Keyes said Icahn agreed to be a potential source of financing for the deal.
Icahn didn’t return calls for comment.
Dissident Circuit City shareholder Mark Wattles, head of Wattles Capital Management, which owns 6.5% of Circuit City stock, called the Blockbuster bid “attractive” in an interview on CNBC.
This month Wattles wrote to Circuit City’s board blasting the company’s financial performance, saying “the net impact of this senior management team’s ‘turnaround’ effort . . . has been disastrous” and calling for Schoonover’s ouster and the election of five new directors.
Analysts questioned whether Blockbuster would be able to market Circuit City’s big-ticket items, specifically large electronics such as televisions. Blockbuster does not need to own Circuit City to reach its convergence goals, Telsey Advisory Group analyst Joseph Feldman said, especially when partnerships with electronics manufacturers such as Sony Corp. or Samsung Group could help stock Blockbuster shelves with gadgets.
The bid could be a real estate play. Blockbuster, mostly a bricks-and-mortar retailer, could be anticipating the acceleration of the video market’s shift online and trying to beef up its thousands of physical properties with products that will continue to draw customers, Feldman said.
Shares of Blockbuster fell 32 cents, or 10%, to $2.81 on Monday.
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Times staff writer Michelle Quinn contributed to this report.
