Blockbuster to take $1B US bid to Circuit City shareholders

Blockbuster Inc. said Monday it will take an unsolicited $1-billion-plus US bid for Circuit City Stores Inc. directly to shareholders of the nation's second biggest consumer electronics chain, saying the struggling retailer has not responded to repeated offers.

Blockbuster, however, has had troubles of its own competing with online movie rental operators like Netflix Inc., and Circuit City questioned whether it has the financing to do the deal.

Blockbuster chief executive James Keyes said a deal would create a chain that could sell portable devices and entertainment for them, much like Apple Inc.'s stores.

Keyes said the offer is supported by Blockbuster board member Carl Icahn, who could be a source of financing for the deal.

Circuit City said it has exchanged information with Blockbuster but wasn't convinced how the movie-rental chain would finance its offer. Circuit City advised its shareholders to take no action until the company board reviews the bid.

Blockbuster said it has been in talks with Circuit City for months regarding an acquisition, and sent a letter Feb. 17 to Circuit City chairman and chief executive Philip Schoonover offering $6 to $8 US per share in cash for the company.

Based on Circuit City's 168.4 million shares outstanding at Dec. 31, 2007, the deal values Circuit City at $1.01 billion to $1.35 billion US. The offer also represents a 25 per cent to 67 per cent premium to Circuit City's closing stock price of $4.79 US on Feb. 15, the last trading day before Blockbuster made its offer, and at least a 54 per cent premium to the stock's closing stock price Friday of $3.90 US.

Circuit City shares rose $1.07 US, or 27 per cent, to $4.97 US on the NYSE, while Blockbuster shares fell 32 cents, or 10 per cent, to $2.81.

Circuit City is the No. 2 consumer electronics chain in the United States after Best Buy Inc., which is based in Minnesota.

Circuit City had more than 788 retail stores and dealer outlets in Canada at the end of 2007. Circuit City bought its Canadian stores from InterTAN in 2004 and rebranded them from their previous Radio Shack name.

Blockbuster said in its February letter it is willing to pursue alternative deal structures that would enable Circuit City shareholders to receive stock. The company would expect to fund the takeover with borrowings and issuance of additional stock through a rights offering to existing shareholders.

Blockbuster says that it requested a response by Feb. 21, but, to date, Circuit City has failed to provide due diligence necessary to allow Blockbuster to make a definitive takeover proposal.

Blockbuster is asking for such information as Circuit City's long-term corporate strategic plan and outlook, detailed store-level performance data and current inventory aging schedules, among other items.

Keyes called the offer "a significant premium" to Circuit City's share price and said the combination of the chains would create "a game-changing retail concept with a sustainable competitive advantage."

Keyes also said the decision to move forward with a bid despite the lack of response from Circuit City management "really came from the situation in the marketplace now and of course the current recent trading price of Circuit City."

Circuit City shares have declined steadily from a year-ago high of $19.12 to reach a low of $3.44 last month. The struggling electronics retailer, the nation's second largest, did swing a profit of $4.85 million for its fiscal fourth quarter, because of cost-cutting efforts and a $7.3 million tax benefit — its first quarterly profit since the second quarter of 2007.

Shareholder pressure

It is facing pressure from activist shareholder Wattles Capital Management that seeks improved profitability and the ousting of Schoonover and the board.

Mark J. Wattles has said turnaround efforts under Schoonover have been "disastrous" and suggested other changes to help "unlock hundreds of millions of value in the near term and billions of value in the long-term."

Wattles, founder of the Hollywood Entertainment video-rental chain, wants to kick out all of Circuit City's 12-member board and nominate five directors. The owner of the 32-store Ultimate Electronics chain had also said that Circuit City should hire an investment bank to evaluate any possibility for a takeover offer.