The Vultures Swoop in on Circuit City

Circuit City (CC), the electronics retailer in dismal shape due to gross mismanagement, received a take-over bid from Blockbuster (BBI), the video rental retailer that has an existing set of problems. Vultures have been eying the carcass of Circuit City for a good period of time; it should not be a surprise that another retailer has swooped in to take a peck.

In terms of business intent, a combination with Blockbuster may be one of the better proposed deals placed on the table. Certainly better than simply selling out to a private equity firm. In reality, many would look at Blockbuster as being more of a white knight than a vulture.

Highlights of the offer include $6 to $8 per share in cash, a total of up to $1.3 billion. It appears that the chronically mismanaged Circuit City has effectively ignored earlier private proposals, so Blockbuster took the step of making this bid public and engaging shareholders. The press releases indicate that Blockbuster is proposing to use a rights offering, a mechanism that allows existing shareholders to buy additional shares of a company, in order to complete the transaction. Rights offerings are rare in the United States and typically occur at a discounted price.

Blockbuster has emerged as a survivor in a movie rental industry that is undergoing sharp transition. Over the past couple of years, several competitors such as Movie Gallery and Hollywood Video filed for bankruptcy or have been shuttering stores. Competition from online firms, delivering rentals via mail, such as Netflix (NFLX) have stepped up the bar in the industry. Pay per view films offered by cable operators have also deeply cut into the rental business. Being strictly a corner store video rental business is no longer a viable business model.

Blockbuster touted the synergies of the proposed combination; pointing to the ability to cut costs, exploit the growing convergence of media content and electronic devices, and benefit from selling complementary products. Circuit City stores are typically larger than Blockbuster storefronts; one could expect to see “Blockbuster super-stores” that sell electronics and rents movies. However, even if the deal is completed the expectation is that is would take over 12 months to see viable traction with the combination. A large number of existing neighborhood Blockbuster stores would probably be shuttered; frustrating consumers who have to drive longer distances to the new “super stores”, many which are located in crowded malls.

Investors also appear to be skeptical as they drove Blockbuster stock down over 10% in trading on Monday. Many doubt that Blockbuster can cure the problems plaguing Circuit City without causing a tremendous distraction to the company’s primary business. The financing for the transaction is also in doubt and may be dilutive.

Circuit City, winner of the dumbest retail business move of 2007, is poorly managed underperformer. Its closest competitor, Best Buy (BBY), has been dominating the electronics retail segment. In a continuing sad saga, Circuit City handed out sizable bonuses for executives while cutting top-performing employees at stores because they were “over-paid”. In response both the sales and stock price tanked. The ills of Circuit City can only be resolved by the replacement of the current management team, and a complete re-focus on the consumer.

Circuit City stock rose nearly 30% on Monday when the news hit the wire. The bid by Blockbuster may be just the front end of a chain of bids for the company. Other players, who have been sitting on the sideline, now may be forced to show their hands and open their wallets. Setting the table for a possible bidding war, an event that would please many long-suffering Circuit City stockholders immensely.

Disclosure: none

Comments

[CrossProfit_:]

"Other players, who have been sitting on the sideline, now may be forced to show their hands and open their wallets."

Can you name one? Even a guess will do.

Do you know the store/real estate breakdown? Have you looked at the free cash flow, balance sheet and debt structure etc.?

Enlighten us please!

CrossProfit

2008 Apr 15 08:00 AM

[billddrummer:]

As of 2/28/07, CC had 5 owned stores, a portion of a distribution center, and part of its HQ complex. The InterTAN chain of stores in Canada averages $771,000 a year in revenue/location. FCF has been negative for the past 5 quarters, and the profit recorded during the 4th quarter of FY 2008 resulted from a tax credit--top-line margins shrank (off nearly 4 points) and the company reported an operating loss of nearly $3 million during the holiday season.

Cash on hand has been steadily shrinking, and chances are good that the company will start tapping its credit line to fund inventory purchases and store remodels.

Same store sales were off 7% in the 4th quarter, 11% for the full year.

Every product category showed YoY sales decreases. The only domestic bright spot was Firedog, that had good growth. It wasn't enough to offset weakness in product sales, though.

Interesting to me is the fact that despite all the posturing, the 'turnaround' strategy has accelerated this company's downward trends.

Buyout is imminent, in my view.

2008 Apr 29 02:02 PM

[billddrummer:]

In response to your initial question, a cash-rich hedge fund could make a play and immediately close and sell-off underperforming stores to regional players looking to expand. It wouldn't take much to interest an hhgregg or Fry's in some of their locations, and it would save those firms money that are wanting to add new stores.

2008 Apr 29 02:04 PM

[Greg Boop:]

Commentary hit the news today about several bidders taking a run at Circuit City.

With Blockbuster coming out with a public bid, it was time to either fish or cut bait for all other potential suitors. Within a month, we can probably expect to see the sale of Circuit City, porbably at a distress price.


Circuit City may have several bidders
biz.yahoo.com/rb/08062...

2008 Jun 24 06:24 PM

[billddrummer:]

To HingeFire,

See my previous posts on this thread. I agree with you, and think the winner of the bid will be someone other than BBI. My guess is a hedge fund that sees value in lease commitments on underperforming stores in good locations (refer to CompUsa's sale of 17 leases to BBY for reference). If BBI won out, they'd be less willing to jettison stores that don't perform. A hedge fund wouldn't have that limitation, in my view. Just close the ones that don't perform, sell off unnecessary assets (like the InterTan division, that hasn't done anything for years) and move on with life.

Either way, Schoonover needs to clean out his office.

2008 Jun 24 06:45 PM