Blockbuster's bizarre play for Circuit City
Posted
Apr 14 2008, 03:19 PM
by
Kim Peterson
Rating:
Does one loser plus one loser equal a winner? Not in the case of Blockbuster, whose offer to buy Circuit City is being met today with near-universal derision and head-scratching.
The video chain, which has been in a losing battle with Netflix, has offered as much as $1.3 billion for Circuit City. That's more than a 50% premium to Circuit City's closing stock price on Friday. Blockbuster wants to combine the companies into a chain that would sell portable devices, DVDs and other content.
Circuit City investors are understandably thrilled by the potential marriage. Shares of the company soared 28% today to $4.98. The electronics chain has been exploring sale possibilities, and this kind of premium is attractive. Blockbuster investors, on the other hand, are not happy: shares dropped nearly 11% today to $2.79.
Analysts have come out swinging against the deal. Here's a sampling of what they're saying:
"Can Blockbuster even get the financing?" -- Joseph
Feldman, Telsey Advisory Group
"We think that Blockbuster’s move is premature, and borders on being reckless." -- Michael Pachter, Wedbush Morgan Securities
"We fail to understand the strategic value of the company's hostile bid for Circuit City." -- Jeffrey Logsdon, BMO Capital Markets
"The deal appears to us to be a long-odds
attempt by Blockbuster to address its deep structural issues;
we do not see significant synergies." -- Colin McGranahan, Sanford Bernstein
Are there any potential positives? Well, if the combination were successful, Blockbuster would have a huge retail presence in the U.S., and a broader customer base to sell or rent movies to, according to Lehman's Doug Anmuth. Circuit City would get some desperately-needed help competing against Best Buy.
Blockbuster said that within six months of the deal closing, Circuit City stores would be offering movie and video game rentals. Later on, Blockbuster would start selling portable-media players and other devices.
The deal is fraught with problems that outweigh any positives, however. The biggie is whether Blockbuster can even fund the acquisition, and how much more debt would it incur to do so. Pachter at Wedbush Morgan estimates that Blockbuster would raise about $500 million through a rights offering and take an additional $500-$800 million in incremental debt.
Other negatives: A slowing economy that could hurt retail sales. Tough competition from Best Buy and Wal-Mart. The in-store video rental business is being killed by the Internet. Blockbuster and Circuit City have had to close hundreds of stores recently. And both companies have been poorly managed for years.
Despite all the criticism, I think the deal will happen. And we'll see two sinking ships sink faster together.
