Can Circuit City be saved?
Posted
Jun 25 2008, 12:15 PM
by
Anthony Mirhaydari
Rating:
For Circuit City and its investors, the last couple years have been nothing but torture. Witness the epic share-price decline of nearly 90% over the past two years. Witness the glimmer of hope brought about by Blockbuster's proposed takeover offer in April, which is backed by Carl Icahn, only to see the market severely discount any chance of it happening. Witness yesterday's anticlimactic shareholders meeting where the biggest news was that activist investor Mark Wattles compared corporate due diligence to canine mating rituals.
Although things are dour, they aren't lacking in excitement: Shares in both Circuit City and Blockbuster have been wildly volatile in heavy trading as investors set the odds and outcomes of a possible pairing of the two struggling brands. Circuit City traded down nearly 30% on Monday after Sterne Agee analyst Arvind Bhatia released a note over the weekend that placed the probability of the originally proposed $6 per share offer actually going through at 5%.
A more likely outcome, according to the analyst, is one where Blockbuster lowers its offer to $4 to $5 dollars a share. Assuming a $4.50 a share deal puts roughly a $750 million enterprise value on the beleaguered retailer. Arvind is looking at deal synergies of about $700 million as Blockbuster expands its footprint and realizes cost efficiencies. A transaction valued at 1x the initial synergies could be a deal that sparks the interest of Blockbuster's shareholders, but only when accompanied by details on "how Circuit's core business could be turned around." What he means is selling consumer electronics at an unprecedented time of consumer discontent.
Not an easy matter, especially when the company is burning cash like tinder and can't get any traction on its turnaround plan. Results from the first quarter were released last week, and they weren’t pretty: Earnings per share fell further into the red (-$1.00 vs. -$0.33 last year), same-store sales were weaker than expected (-11.3% vs. -5.6% last year), and the operating margin collapsed (down 3.5% to 7%) on markdowns and reduced sales volume.
JPMorgan analyst Chris Horvers notes that the company ended the first quarter with $92 million in cash on hand, and will likely use $150 million in the current quarter. No wonder the company cut its dividend payment and prepared to issue more equity in a desperate attempt to find a tourniquet and stop the bleeding.
Gregory Melich at Morgan Stanley believes that at this point, shares are starting to look more and more like options on Circuit City's survival. While the company tries to boost its chances by closing underperforming locations and rolling out its new "The City" store concept, it's looking less and less likely that management will be given the luxury of time.
Mark Wattles, who accumulated a 6.5% stake in the company at prices between $4 and $30 a share and just put three directors on the board, is telling anyone who will listen that multiple buyers are interested. He told Reuters over the phone yesterday that he is "very confident that we will be seeing who the buyer of Circuit City is in the next three or four weeks and what the price is." The question is: Do you believe him, especially when Blockbuster CEO Jim Keyes seems to be hedging?
Shares are up nearly 7% today on heavy volume after Wattles' comments rejuvenated investor confidence. Significant technical resistance remains as shares trade near all-time lows.
Previous posts:
Best Buy, tax rebates aside, still faces trouble
Circuit City starts taking Blockbuster seriously
Blockbuster's bizarre play for Circuit City
Is the Circuit City deathwatch on?
(Disclosure: I don't own any shares of the companies mentioned.)
