Wednesday, April 16, 2008

Blockbuster/Circuit City Deal?

Is the blockbuster/circuit city deal a good one? Here is some information that may help you determine weather it is or not, or my spark your interest too look further into the deal....

Circuity City is currently trading under 5 dollars, and their stock has tumbled since mid 2006....

Similarly so, Blockbusters (trading under $3) stock has been consistenetly falling since the begining of 2004. They have tried many different technigues to keep thr store competive over the past years, and they just can not seem to get back to where they were...

This is a piece from the Wall Street Journal dot com discussing the deal...check out the companies further...BBI and CC...
Blockbuster and Circuit City: More Explanation, Please
Posted by Heidi N. Moore
Sometimes, unsolicited offers don’t see the light of day for good reason. Should Blockbuster’s bold offer for big-box electronics retailer Circuit City have been that kind of deal?
Blockbuster is pushing an unsolicited $1 billion offer to take over Circuit City. The troubled video-rental chain actually made the offer in February, but Circuit City management prevented Blockbuster from studying its finances or operations. Now Blockbuster has gone public with the offer, and it has the backing of Carl Icahn, who also is backstopping a rights offering attached to the deal to prove that Blockbuster can get financing for the bid.
Circuit City has publicly opposed the deal, in part because it doubts Blockbuster’s ability to get financing (that statement was issued before the Icahn news). But why stop there? Blockbuster seems to have to prove a lot of things to get this deal done, like, ‘Why does it make sense?’
Overlapping products and services? Blockbuster will have to explain a bit more how its rental business is a good fit–rather than direct competition–for Circuit City’s video sales business. Blockbuster’s video- and DVD-rental business has some awkward gaps with Circuit City’s big-box electronics retail strategy. Circuit City’s prices for electronics and DVDs have fallen because it has larger economies of scale. Blockbuster management is betting that consumers will want to buy DVDs at the same place they rent them; that might be the case, but will consumers be as eager to rent for $5 a night what they can simply buy for $15 a few aisles away? This is especially of concern since Blockbuster has been raising rental prices as part of a recent overhaul of its businesses.
Doing a deal to solve operational problems? Not exactly. In fact, this deal would represent a move in an entirely different direction for Blockbuster. An argument could be made that both companies have serious strategic issues that they need to deal with before even considering a combination. In 2007, Circuity City reported a loss of $321.4 million, and Blockbuster a loss of $74.2 million. Blockbuster’s management has been digging itself out of the hole by slashing costs and raising prices. The company is forecasting first-quarter net income of $30 million–swinging from the year-earlier loss of $49 million. Still, the timing of Blockbuster’s strategy raises questions: Will rising prices play well amid a pullback of consumer spending in the recession some say the U.S. has fallen into? If the strategy ends up yoking together two companies with deeper problems, it will bring to mind the old joke among investment bankers about bad deals: “tying together two stones to see if they float.”
Ease of getting a deal done? Blockbuster’s market cap is $630 million, smaller than Circuit City’s $750 million. The size discrepancy was behind Circuit City’s sniffing about the financing. While Icahn’s offer to backstop a rights offering goes some way to answering that concern, it may not go far enough for Circuit City management and shareholders to open the books and take a chance that this deal will go through.
Is this about real estate? Blockbuster CEO Jim Keyes indicated that part of his rationale for the deal would be combining systems, back-office operations like accounting, better deals with vendors and–this should give investors pause — “rationalization of the companies’ real estate.” Hedge-fund maven Eddie Lampert took over Kmart and combined it with Sears partly in what Wall Street called “a real-estate play. But, “although shares of Sears rose tenfold since 2003, the prospects for that line of investing have become dim, and both Kmart and Sears are in need of more direct investment, according to some analysts. Lampert took his hands off the situation this year.
Are activist investors calling the shots, or is management? A deal this counterintuitive has a high bar to jump in terms of justification, and investors will want to know that management has a firm hand on the wheel. In this case, however, activist shareholders seem to be speaking louder than management. Icahn’s support on the Blockbuster side, aligns with the interests of Circuit City investor Mark Wattles, who has been lobbying for a sale of the company and an overhaul of management and the board. Icahn already succeeded in ousting former Blockbuster executive John Antioco.

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