Are You Kidding? Circuit City and Blockbuster?

Blockbuster (BBI) said it made a $1 to $1.3 billion cash offer in a Feb. 17 letter to Circuit City (CC) Chief Executive Philip Schoonover. They decided to go public with the offer Monday after Circuit City did not provide access to its books. Circuit City said today of Blockbuster they had "reservations as to their ability to finance the offer." Considering that as of January Blockbuster only had $184 million in cash on the books, they are only $1 to $1.12 billion short of the stated goal.

How? Why? Haven't shareholders suffered enough? Why does management hate them so much? In the letter Blockbuster CEO Jim Keyes said,

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.

Blockbuster will have to essentially dilute shareholders to the max and then raid the credit line CC set up in February to fund the deal, since banks are not loaning money for deals that make sense, much less one that means a struggling retailer barely making a profit buying one that isn't.

The larger issue is, what is Blockbuster trying to become? It has a valuable franchise in video; if the company would just realize the video store concept is officially dead. Adding more brick and mortar locations, diluting shareholders and maxing out the credit line to acquire another problem is a huge mistake.

Keyes said:

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.

He has mentioned this vision before but it has yet to be rolled out in Blockbuster locations, why bet the farm on a wholly unproven concept? He talks about "differentiating products" in both locations. That is confusing because I was not aware of any similarities currently. Let's also be honest here. Using the term "management's strengths" and either Blockbuster or Circuit City in the same sentence is laughable, unless it is preceded by "lack of".

Were RadioShack (RSK) to make a run a CC, that would make sense. Perhaps Borders (BGP) and Barnes and Noble (BKS) make sense too. This doesn't on any level. Maybe Keyes is officially throwing on the towel in the war with Netflix (NFLX) and has decided to try a new direction?

Circuit City shareholders should jump at the price because it won't see $6 to $8 a share anytime soon, this will destroy Blockbuster holders...

Disclosure: Long BGP.

Comments

[User 151630]

Blockbuster & C-City an interesting idea. From a customers point of few it would be great to have a C-City on every corner just so I did not have to deal with the Lake of customer service and atitude at Best Buy.

[billddrummer]

Dumb, dumb, and dumber. But the good news is, CC will finally have to cough up the financial data it's been hiding from everyone for so long, and fresh eyes will be able to close the 50% of underperforming stores without remorse. They've succeeded in raising revenue/location for the Canadian stores to a whopping $150,000 a year. Wow. I'm speechless.

[billddrummer]

My error on the Canadian stores. It's actually $771,000 a year. Now all I wonder is what the chain will bring when it's sold to partially finance the buyout.