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Analysts Critical of Blockbuster's $1.35B Circuit City Bid

14 Apr, 2008 By: Erik Gruenwedel

Wall Street April 14 reacted negatively to news that Blockbuster Inc. had tendered a $6-to-$8 per-share cash offer for consumer electronics retailer Circuit City Stores Inc.

Dallas-based Blockbuster, which sent the proposal via letter to Circuit City chairman and CEO Philip Schoonover Feb. 14, said it went public after Circuit City failed to respond and provide regulatory due diligence.

The news sent Blockbuster shares falling more than 13% as analysts attempted to come to terms with the proposal one called “bone headed.”

The No. 1 DVD rental service said publicizing the bid would make Circuit City shareholders aware of their options and give them an opportunity in determining “the destiny” of the company.

The company said Blockbuster board member and largest shareholder Carl Icahn supported the move and a report said the maverick investor was willing to back the deal financially.

Combining Blockbuster and Circuit City would realize an $18 billion global retail enterprise. Blockbuster operates nearly 8,000 stores globally while Circuit City operates 693 stores domestically and 779 locations abroad.

“Our proposal offers Circuit City a significant premium to its existing stock price and creates a game-changing retail concept with a sustainable competitive advantage,” said Blockbuster CEO Jim Keyes, in a statement.

The former top executive at 7-Eleven, Keyes has mandated transitioning Blockbuster into a retail-centric entertainment provider that delivers both packaged and digital media.

Richmond, Va.-based Circuit City has been under pressure to resurrect itself as revenue and earnings results continue to disappoint.

Adding to the tumult, dissident shareholder Mark Wattles, who co-founded Hollywood Video, recently submitted a slate of board nominees and called for new management, including the firing of Schoonover.

Circuit City said it would not cooperate after failing to receive proper financial assurances from Blockbuster. The retailer advised its shareholders to reserve judgment.

“While willing to engage in discussions to further understand Blockbuster's proposal, Circuit City is unwilling to provide additional detailed due diligence information and embark on a highly conditional undertaking until these questions are answered satisfactorily,” the retailer said in a statement.

Speaking to investors Monday, Keyes said Blockbuster's offer was compelling and at $6 per share represented a 54% premium on Circuit City's closing price April 11.

He said that despite initial negativity by the market toward the offer, Blockbuster remained committed and believed the upside for shareholders of both companies was “simply too attractive to ignore.”

The CEO said the rental company had the cash to complete the deal but was willing to issue additional shares to existing shareholders to make it happen. Keyes said the move did not reflect a retraction of efforts toward distributing movie rentals via kiosks and electronically.

His enthusiasm was perhaps bolstered by the fact that Blockbuster expects to report a profit of $30 million for the first quarter fiscal 2008 (which ended March 31), compared to a loss of $49 million during the same period in the previous year.

Keyes said combining Blockbuster's entertainment content with Circuit City's CE prowess would result in a financially stronger company and a “compelling consumer proposition … that our peers simply could not match.”

The CEO envisioned a Blockbuster rental kiosk in Circuit City stores and Circuit City video game terminals in Blockbuster.

Analysts aren't so sure.

Henry Blodget and Aaron Task, analysts with Yahoo's Tech Ticker, belittled the proposal, calling it one of the worst mergers & acquisition offers ever.

The two said they first assumed Best Buy Co. had made the offer and couldn't believe it was actually Blockbuster, which they said doesn't have the available cash or mojo to pull it off.

“It's just hard to fathom how these two companies are going to come together that makes sense,” Task said. “It's really ridiculous.”

Blodget said that conceptually combining Blockbuster with a major CE retailer would work only if you ignored the evolution of entertainment distribution, including DVD rental pioneer Netflix Inc., digital video recorders and video-on-demand.

He said both companies are in trouble financially, with Blockbuster and Circuit City's stocks down 52% and nearly 80%, respectively, from a year ago.

Task said Circuit City continues to be plagued by poor strategic planning, including the firing of more than 3,400 sales personnel he said actually knew what they were selling.

“If I'm a Circuit City shareholder this morning, I'm saying, ‘thank you Blockbuster, I'll take your cash,’ Task said. “If you put two bricks together, they're still not going to float.”

“It just screams trouble,” Blodget said.

Michael Pachter, media analyst with Wedbush Morgan Securities in Los Angeles, was equally circumspect.

He said Circuit City had been slow to respond since it didn't think Blockbuster had the financing to make its bid viable.

“We are surprised by this news and do not believe that Blockbuster's desire to acquire Circuit City is good for Blockbuster,” Pachter said in a note.

He said Blockbuster's stock would rebound once management abandoned the bid following investor concerns.

“We believe it is prudent for Blockbuster to stay the course on its own restructuring, with ever-increasing focus to accelerate the pace of asset sales and debt repayment, with a more immediate return to shareholders,” Pachter said.

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