Blockbuster sees media convergence; Offers to buy Circuit City

Blockbuster sees media convergence; Offers to buy Circuit City

Summary: Updated: Here's a deal where 1 + 1 = 0.5: Blockbuster is offering to acquire Circuit City for "a least $6 a share.

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TOPICS: Banking
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Updated: Here's a deal where 1 + 1 = 0.5: Blockbuster is offering to acquire Circuit City for "a least $6 a share."

Blockbuster went public on Monday (statement) with an offer to buy Circuit City. Blockbuster says it sent a letter Feb. 17, but Circuit City declined to follow up and "provide (the) due diligence necessary to allow Blockbuster to make a definitive proposal."

Memo to Circuit City shareholders: Take the deal. It sure beats the $3.90 closing price for Circuit City shares. Memo to Blockbuster: What are you thinking?

Blockbuster says it's damn serious about this growing convergence of media content and electronic devices. Fair enough, but what does that have to do with buying a retail chain that's a mess?

Blockbuster says:

The transaction would allow both companies to benefit from the revenue growth generated by their complementary products, while the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value.

The truth: Both companies will continue to struggle.

Meanwhile it's likely that Best Buy will continue to thump Circuit City--whether Blockbuster is involved or not.

UBS analyst Brian Nagel said in a research note:

RadioShack (RSH) and Blockbuster forged a strategic partnership several years ago that attempted to bring together video rental and CE sales. This venture quickly failed. We look somewhat more favorably upon the potential merits of a CC and BBI combination. We nonetheless expect industry leading Best Buy (BBY) to capitalize upon disruptions in the retail environment and potential vendor concerns with the deal.

Blockbuster Chairman and Chief Executive Officer Jim Keyes says:

"At Blockbuster, we have successfully deployed a series of strategic initiatives designed to provide our customers with convenient access to media content. These strategic initiatives have already improved our financial results. Driven by strong performance in our domestic same-store revenues, we expect first quarter 2008 adjusted EBITDA to be approximately $110 million versus $23 million for the same period last year. Additionally, net income for the first quarter of this year should be $30 million compared to a net loss of $49 million for the first quarter of 2007. These results are a clear demonstration that our strategy is working. We look forward to engaging in further conversations with Circuit City and reaching an agreement as soon as possible."

The truth: Blockbuster's business is eroding quickly. Keyes gussied the place up a bit and now thinks he can run Circuit City. Good luck with that one folks.

Update: Circuit City has confirmed that it has received Blockbuster's offer and said it will "continue to carefully consider and evaluate Blockbuster's unsolicited proposal." Circuit City also questions whether Blockbuster can close the deal. In a statement, Circuit City said:

Circuit City and its advisors have a number of other fundamental questions regarding the structure, sources and uses of funds and consents required with respect to the proposed transaction. Among those questions are whether the proposed acquisition would require a refinancing of the existing Blockbuster debt, and if so, what would be the terms and structure of any new debt; how large a rights offering would be required to fund the transaction and what steps Blockbuster has taken to provide a backstop to ensure successful execution of the rights offering contemplated; and what precise internal and external approvals Blockbuster anticipates for a proposed transaction, including approval of the contemplated rights offering by Blockbuster shareholders and registration of the offering with the Securities and Exchange Commission.

Update 2: The Wall Street Journal reports that investor Carl Icahn has agreed to finance the Blockbuster purchase. That move instantly allays the concerns by Circuit City.

I'm still confused about why this deal makes so much sense for Blockbuster.

Here's the Blockbuster's original letter:

February 17, 2008

Mr. Philip J. Schoonover

Chairman, President, and Chief Executive Officer

Circuit City Stores, Inc.

9950 Mayland Drive

Richmond, VA 23233

Dear Phil:

Since early December, we have had a number of conversations regarding the potential combination of our businesses. As a follow-up to those discussions, I would like to formally reiterate our interest in pursuing an acquisition of Circuit City. The purpose of this letter is to ensure that there is no ambiguity and to outline our proposal.

Our vision for the "new" Blockbuster is to be the most convenient source for media entertainment. We have undertaken a series of strategic initiatives including enhancement of our core rental business; a transition from solely rental to a concentration on consumer retail; and development of the fast- growing digital download market. We are pleased that these strategic initiatives have begun to improve our financial results and anticipate further improvement going forward.

The combination of Blockbuster and Circuit City will result in an $18 billion retail enterprise uniquely positioned for the convergence of media content and electronic devices. We would seek to differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices. Both companies would benefit from complementary products, marketing, management strengths, technology and distribution and the resulting synergies would significantly improve consolidated financial performance. Overall, I strongly believe that a combination of Blockbuster and Circuit City would deliver significant value to our respective shareholders, enhance the overall customer experience, and energize our employees.

Based on our review of publicly available information, we are confident that we can provide a substantial premium to your shareholders with an all cash offer in the range of $6.00 to $8.00 per share, subject to due diligence. We are also willing to pursue alternative structures which would enable Circuit City shareholders to receive stock and participate in what we believe would be an exciting future for the combined enterprise. Given current debt market conditions, we believe most of the cash necessary would be generated through the issuance of additional Blockbuster equity, most probably in a rights offering to our existing shareholders. We believe they, and the market, will recognize the merits of this transaction and we are confident that we can raise the required equity. The borrowing capacity of the combined business would provide the remaining cash proceeds.

Time is of the essence and we are focused on minimizing the risk of business disruption. We are prepared to commence a very short due diligence process immediately, on the basis of exclusivity, with the intention of entering into a definitive agreement shortly thereafter. Attached, as an appendix to this letter, you will find a concise list of the most critical due diligence items which we would need to review in order to confirm our final offer. We have reviewed this potential transaction with our board of directors, and it is with their full support that we make this request to move forward. Given the importance of this opportunity to Blockbuster and the strong desire to complete it as soon as possible, we would be grateful for your response no later than 5:00 PM CST on February 21, 2008.

Again, I thank you for the time you have spent discussing this opportunity with me. I am prepared to discuss the details of this proposal at your earliest convenience and believe that we will be able to quickly come to a mutually beneficial agreement. I look forward to working together on this exciting opportunity.

Very truly yours,

Jim Keyes

Chairman and Chief Executive Officer

Blockbuster Inc.

Topic: Banking

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14 comments
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  • I don't understand it either.

    I just don't see how merging these two will make them both successfull either. This is like merging Sear's and KMART. I just do not get it. Movie rentals are a dying breed and until a formal way that everyone agrees on for movie downloads to a TV become standard I just don't see blockbuster as a force. Cable companies are making Movies-On-Demand simple and expanding their movie offerings.
    redtrain65
  • RE: Blockbuster sees media convergence; Offers to buy Circuit City

    Sounds like the AOL Time Warner hook-up: "blah-blah ... convergence ... blah-blah ... synergies ... complimentary products ... blah-blah" These business types really need to find a way to contribute to society that does not involve business.
    7mgte
  • WAY Overpriced

    Circuit City is the butt of jokes around here because they overinflate their prices and have subpar staff....I doubt Blockbuster is going to fix that.
    itanalyst2@...
    • really...

      I bought a very good HP printer and an excellent Toshiba 42 TV both good quality products at very good prices.
      redtrain65
    • Not always

      The subpar staff also extends to those who enter inventory and price data. I recently got a loaded Acer dual-core that was on sale for about $500 with a 19'' LCD for $400 with a 22'' LCD. That's how it rang up when they ran the code...the person ran it through 3 times because he couldn't believe it.

      My point -- there are still good deals to be had. Have them run it through before you decide to buy it...you might get a deal you can't refuse.
      Taz_z
  • Would they sell NetFlix enabled devices?

    I don't trust their intentions. This will help them "dictate" what technology gets rolled out. If they don't like a particular device/format...they probably won't carry it or promote it much. Can you imagine them carrying/promoting a NetFlix enabled devices???
    USArcher
  • Optimism

    So the market will be so excited by the combination of two companies suffering from negative narratives that buyers will rush to obtain stock in the combined company. This is the plan to produce the cash needed to buy Circuit City.

    And all those analysts who have criticized the Microsoft proposal to Yahoo! will announce Now this is a deal that makes sense. Buying a computer from Circuit City in order to download movies from Blockbuster is the biggest marketing opportunity we've heard in years. Our only question is Why didn't we think of it first? That's why we'll never make as many $10's of millions as a CEO.


    Don't believe it? Quoting:

    We are also willing to pursue alternative structures which would enable Circuit City shareholders to receive stock and participate in what we believe would be an exciting future for the combined enterprise. Given current debt market conditions, we believe most of the cash necessary would be generated through the issuance of additional Blockbuster equity, most probably in a rights offering to our existing shareholders. We believe they, and the market, will recognize the merits of this transaction and we are confident that we can raise the required equity. The borrowing capacity of the combined business would provide the remaining cash proceeds.
    Anton Philidor
    • Blockbuster is trying to stay relevant

      Buying CC does not make much sense.
      A few months ago we had Computer USA going down the tubes. That would have been a far better deal for Blockbuster given the big discount for a Circuit City like business.
      Investors should always be cautios when growing through aquisitions rather than development.
      The only 'efficiency' I can think of is to put a Blockbuster store in every CC store + some marketing gimmicks.
      Linux Geek
      • Ecsape route

        This is an escape route for Blockbutster's brick and mortar business. They will move the stores into CC's and close the standalones. Thats probably the only way they can scale back the in person movie rentals without having half empty stores.

        The question I ask though is where is the movie rental business going? Neither AppleTV or the Xbox Live service seem to have taken off drastically. Are people doing PPV and Netflix?
        storm14k
    • Past optimism

      They were also irrationally optimistic about divx which just about everybody predicted to fail except those optimistic CC execs. The only good thing for the execs is that this is a chance to cash out instead of crash out...if what they receive is worth anything. I'm wondering when the proverbial large Blockbuster shareholder is going to raise a big stink.
      Taz_z
  • Two Sinking Barges throwing each other a rescue line

    They would be doomed together.
    NotMSUser
    • Not just rescue lines...

      ...the rescue lines have anchors at the ends. Two sinking companies that merge should sink even faster.
      Taz_z
  • RE: Blockbuster sees media convergence; Offers to buy Circuit City

    Yea! CC can finally be the weight that drags BB to the bottom!
    Jim-Premier
  • If Carl Ichan is involved...

    ...thw workers of BOTH companies better start looking for new jobs quickly.

    He will dismantle both organizations & sell the assets. That's his MO.
    IT_Guy_z