Is the Market More Hostile to Blockbuster's Proposed Takeover Than Circuit City Is?

So this one is a head-scratcher. Blockbuster (BBI) this morning offered to buy Circuit City (CC) for “at least” $6 a share in cash. Given the state of the bond market, Blockbuster proposes to finance the deal with an enormous rights offering to existing stockholders. I’m not sure I have ever seen that happen before. Circuit City holders are clearly delighted with the news, but Blockbuster shares are getting clocked. Circuit City seems unconvinced that Blockbuster can actually pull off a deal funded by a rights offering, and is refusing to co-operate. In fact, Blockbuster apparently has been trying to make this happen for months, but with little interest from Circuit City.

Blockbuster said it made the offer on February 17, but that Circuit City “has failed to provide due diligence necessary to allow Blockbuster to make a definitive proposal.” The text of a February letter Blockbuster sent to Circuit City proposing the deal notes that the companies had conversations about a possible deal as far back as early December.

In the letter, Blockbuster says it could offer an all-cash offer in the $6-$8 a share range, with most of the cash generated through the issuance of additional Blockbuster equity, most likely through a rights offering to Blockbuster’s existing holders.

Circuit City responded in its own release, acknowledging receipt of Blockbuster’s offer. The company said it will evaluate the proposal; it advised holders to take no action at this time. Circuit City said that to date Blockbuster has been unable to provide evidence that a deal can be financed. “Blockbuster’s proposal appears to contemplate a rights offering of unprecedented size relative to the issuing company’s market capitalization and at a price that is at a significant premium to Blockbuster’s current market place,” Circuit City said. The company also raised questions about whether a deal would require refinancing of Blockbuster’s existing debt.

This morning, Circuit City is up $1.10, or 28.23%, at $5.00. Blockbuster is down 36 cents, or 11.5%, at $2.77.