Retailer says offer "too attractive to ignore"

Struggling vidtailer Blockbuster revealed a surprise proposal to acquire electronics chain Circuit City, only to see its stock drop 10% Monday as Wall Streeters tried to make sense of it.

The cash offer of between $6 and $8 a share, made Feb. 17, is only now becoming public, according to Blockbuster, because the company wants Circuit City shareholders to have an adequate chance to weigh in.

While it is typical for the stock of an acquiring company to suffer a penalty on takeover news, Blockbuster shares were hit hard, finishing at $2.81 after establishing a new 52-week intraday low. Circuit City’s similarly battered shares ended the high-volume day up 27% to $4.97.

Blockbuster chief exec Jim Keyes, who’s been getting high marks in the vid biz for his turnaround efforts at the chain, described the opportunity as “simply too attractive to ignore.” In a conference call Monday, he stressed the window was closing on the chance to do a deal, noting the sector’s shift toward digital distribution.

“Convergence and the availability of digital content marrying digital content with devices is going to happen by us or by others in the marketplace,” he said. “Apple clearly has already made the most progress in this avenue.”

Carl Icahn, a famously restless shareholder and Blockbuster board member, has promoted the deal behind the scenes. Keyes, who came aboard last summer after a stint running 7-Eleven, said Icahn could even help finance the $1 billion takeover.

Circuit City said its board would “carefully consider and evaluate” the offer but added that “fundamental questions” remain, chiefly the matter of financing.

The electronics chain, incidentally, has been under fire by vidtail veteran Mark Wattles, who founded Hollywood Entertainment and grew it into a national chain by taking on Blockbuster. These days, he’s a major Circuit City shareholder convinced the chain could be doing a better job.

Blasting its turnaround efforts as “disastrous,” he has called for an entirely new board as the company remains mired in a two-year slump. Wattles welcomed the news of Blockbuster’s offer, though anyone taking over Circuit City would likely get his endorsement.

Many analysts expressed bafflement at the timing of Blockbuster’s bid. They accept Keyes’ “closing window” argument but wonder why he would want Blockbuster to increase its brick-and-mortar footprint.

Jeffrey Logsdon of BMO Capital Markets said retail woes in electronics call the deal’s logic into question. He downgraded Blockbuster from “outperform” to “market perform.” In a note, he explained, “It could take 9-12 months to close the deal, then an additional year to potentially realize any strategic or financial synergies. We find it difficult to imagine that fighting what amounts to a two-front war will ultimately enhance value for Blockbuster shareholders.”

However, others credit Keyes for scaling back the chain’s Total Access bricks-and-clicks strategy, which fueled losses its last fiscal year. In December the chain raised Total Access subscription prices in a move away from its low-price competish with Netflix. This move helped the chain quadruple its fourth-quarter earnings to $38.1 million for the period ended Jan. 6. It posted an $85.1 million loss for the full fiscal year, however, due in part to those Total Access investments.

Last August, Blockbuster bought the digital download service MovieLink for $6.6 million in an effort ramp up its digital offerings.

Studio homevid execs had a mixed reaction to the Circuit City bid, calling it intriguing at the very least.

“It could be a much better option than some of the other ones out there, like private equity,” the topper of a major studio homevid arm said.

The chain, he noted, “is very important to us. They’re a key player in the sell-through business and very aggressive in pricing.”

Another homevid topper said the appeal to Blockbuster is clear but less so for the consumer electronics chain. “I’m not sure how intriguing it is to Circuit City,” he said. “Over time, Blockbuster would like to convert to purely retail. Circuit City already is that.”

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