Blockbuster Offers to Buy Circuit City

Blockbuster said it has made a bid to pay up to $1.35 billion for Circuit City, which questioned whether the deal could be financed.
Blockbuster said it has made a bid to pay up to $1.35 billion for Circuit City, which questioned whether the deal could be financed. (By David Duprey -- Associated Press)

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By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, April 15, 2008

Blockbuster said yesterday that it has made an unsolicited offer to buy the struggling Circuit City for more than $1 billion and create a new type of store that would merge multimedia content and consumer electronics.

Circuit City, an electronics retail chain based in Richmond, said it would consider the proposal but questioned whether Blockbuster would be able to finance the deal. The movie-rental company has offered to pay $6 to $8 per share in cash, which would total as much as $1.35 billion and roughly double Blockbuster's market value of about $554 million. Blockbuster said it would raise the money for the deal through borrowing and issuing additional stock.

"We remain strong believers that the upside of this transaction for both companies and their shareholders is simply too attractive to ignore," Blockbuster chief executive Jim Keyes said in a conference call with analysts.

Circuit City shares jumped 27 percent after the news yesterday to close at $4.97. The company is in the midst of a troubled turnaround and last week posted a loss of $319.9 million in fiscal 2008, the biggest in its history. Meanwhile, shares of Blockbuster dropped 10 percent, to close at $2.81, as several analysts questioned the wisdom of the bid by a company undergoing its own makeover.

"We fail to understand the strategic value of the company's hostile bid for Circuit City and believe the combination has the potential to divert management and financial resources from the company's nascent recovery," wrote Jeffrey B. Logsdon, an analyst with BMO Capital Markets, in a note to investors.

Blockbuster began courting Circuit City in December in hopes of creating a one-stop shop for consumers to buy entertainment content and the devices on which to view it. It made a formal offer in a letter to Circuit City dated Feb. 17, but Circuit City has refused to allow Blockbuster to perform an audit. In disclosing its offer yesterday, Blockbuster said it hoped to inform Circuit City shareholders so that they could determine the best course for the company.

Keyes said the merger would create a "game-changing retail concept." Both companies would benefit from complementary products and combined marketing, systems and distribution, he said. Keyes envisioned Blockbuster locations relying on the expertise of Circuit City staff to sell electronics, while Circuit City stores would promote access to Blockbuster's personalized list of preloaded movies and digital subscription services.

Blockbuster has struggled in recent years to compete against rivals such as Netflix. It launched its own mail rental service and last year bought Movielink, which allows customers to download films online. The company lost $74 million in the fiscal year ended in January but posted earnings of $41 million in the last quarter.

"I think this deal confirms the fact that Blockbuster believes the rental business is pretty much dead," said Shahid Khan, a partner at IBB Consulting in Princeton, N.J. "This is a way for them to diversify and actually get into a different business altogether."

Activist investor Mark Wattles, who founded Hollywood Video and controls about 6.5 percent of Circuit City stock, yesterday called Blockbuster's offer "a good starting point." He has urged management to consider any buyout offers and named several nominees to replace Circuit City's board of directors at its annual shareholder meeting in June. Wattles met with the board for the first time last week and said that he will not compromise if it blocks the deal from moving forward.

"My concern is that they're protecting their jobs," said Wattles. "Their responsibility in the position that they're in is to do what's best for shareholders."

First Pacific Advisors, which controls about 7 percent of Circuit City shares, said that the company's wounds are largely self-inflicted and that there is potential for a turnaround. Dennis Bryan, partner and portfolio manager at First Pacific, said $6 per share was "pretty darn cheap." However, he said Circuit City should allow Blockbuster to perform due diligence.

"The ball is in their court," he said.

Blockbuster said it has the backing of its board and its second-largest shareholder, billionaire Carl C. Icahn. Wattles said that he spoke with Icahn yesterday morning and that he was willing to provide capital to secure the deal.

Circuit City has rejected two buyout attempts in recent years -- one by Mexican billionaire Carlos Slim Helu in 2003 and another from Boston hedge fund Highfields Capital Management in 2005. The company was founded in 1949 by Samuel Wurtzel as a television store. His son, Alan, was chief executive from 1972 to 1986 and a former member of its board. He no longer holds stock in the company.

"I will say it's very sad that Circuit City has come to this," Alan Wurtzel said yesterday.


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