B'buster bids to fuse Circuit City

Rental giant offers $1 billion for struggling retailer

Amid a sluggish economy and beaten-down stocks, Blockbuster has gone on the deal offensive.

The video rental giant on Monday took public an unsolicited offer to buy consumer electronics retailer Circuit City for $6-$8 per share, or $1 billion-$1.3 billion, in cash to create what its management believes could become the ultimate converged media and entertainment destination for consumers.

And though coy about details, Blockbuster chairman and CEO Jim Keyes confirmed that the company is working on some sort of digital device that will come loaded with entertainment content and, coupled with a subscription, ought to play movies on TV screens.

Keyes' vision of a combined Blockbuster-Circuit City, an $18 billion global retail giant, is roughly based on the model of Apple stores.

"It brings together hardware, software and service," he told The Reporter. "Blockbuster increased consumption of movie content 20 years ago with our studio partners. We have the same opportunity now in the digital age if we can make it easier and more convenient for consumers."

In a conference call with analysts, Keyes called "convergence" a window of opportunity that is closing. "Apple clearly has made the most progress," he said. "If we don't move now, we run the risk of being left in the dust."

The CEO's grand plan also calls for a new "Blockbuster Media" logo, devices, services and content that consumers could only get at Blockbuster-Circuit City, as well as other initiatives to be revealed later that would make the combined company a convergence leader.

The bid, first made in a letter to Circuit City in mid-February but made public Monday, came as the latest retail sales data from the Commerce Department showed that American consumers spent less on discretionary items in March amid rising costs for gasoline and food. Overall retail sales rose 0.2%, but sales for electronics fell 0.4%, for example.

"It is becoming increasingly evident that consumer spending on discretionary items is in a full-fledged downturn," Merrill Lynch North American economist David Rosenberg said.

Blockbuster said it had offered Circuit City — whose stock has sagged 80% during the past year — $6 per share in cash, a 54% premium over the firm's closing stock price of $3.90 on Friday. But depending on what Blockbuster finds in its due diligence, which Circuit City has not allowed so far, the rental giant could offer as much as $8 a share.

Shares of Circuit City rose 27% on Monday to $4.97, while Blockbuster shares sank 10% to $2.81, making the stock the biggest loser on The Hollywood Reporter Showbiz 50 index.

Blockbuster has 7,830 stores worldwide, 4,855 in the U.S., and Circuit City has 1,472 stores worldwide, of which 693 are in the U.S.

Keyes said, if need be, he'll issue additional Blockbuster shares in order to raise enough cash to buy Circuit City. He also said that Blockbuster's largest shareholder, financier Carl Icahn, is a proponent of the deal.

Also on Monday, Mark Wattles, who founded Hollywood Video and sold the company at an opportune time and price to now-fledgling Movie Gallery, told CNBC that Icahn was "willing to put up capital" to get the Blockbuster-Circuit City deal done.

Wattles controls a large volume of Circuit City shares and has called for the ouster of its CEO and other board members.

At a time of a sluggish U.S. economy and a lack of cheap financing for private equity-led buyouts, observers have expected strategic buyers to step up attempts to buy suffering peers on the cheap.

However, some questioned whether Blockbuster could finance a takeover of Circuit City, which has a larger market value than does its would-be acquirer. Plus, analysts were suggesting Monday that Blockbuster needs to show continued success at turning around its own business before taking over the struggling Circuit City.

Wedbush Morgan analyst Michael Pachter pointed out that Blockbuster had only $185 million in cash as of Dec. 31. "It is not clear to us that Blockbuster will succeed in financing this transaction," he said. "We are surprised by this news and are skeptical that the transaction would yield significant synergies over the foreseeable future."

But Keyes said a merged firm would benefit from the revenue growth generated by complementary products as well as cost savings. He noted solid first-quarter improvements at Blockbuster and said a deal would create "a game-changing retail concept with a sustainable competitive advantage."

Blockbuster said Monday that it expects to report a first-quarter profit of $30 million, compared with a loss of $49 million in the year-ago period.

Georg Szalai reported from New York; Paul Bond reported from Los Angeles.
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