Market response to the Blockbuster (BBI) announcement of their intention to acquire Circuit City (CC) for $1 billion has been at best tepid. Blockbuster stock was trading down about 15% Monday afternoon as investors showed their displeasure.
On its surface, the deal doesn’t seem to make much sense. Blockbuster’s business is struggling and while they finally seemed to get costs under control recently, revenues are still down from their 2004 peak. It has been playing catch up to Netflix’s (NFLX) unlimited rental service for a few years now, but the threats to Blockbuster’s business model come from all directions, including iTunes, Amazon (AMZN) and on-demand cable.
Meanwhile, Circuit City may face an even more difficult future. The company has lost market share to Wal-Mart (WMT) and Best Buy (BBY) and is navigating a tough economy where the credit lines used for big screen televisions are rapidly drying up.
Wedbush Morgan analyst Michael Pachter questions the digital convergence touted by Blockbuster CEO Jim Keyes as impetus for the deal:
We question Blockbuster’s vision for a world of digital convergence, where Circuit City would presumably have a competitive advantage by offering customers the ability to purchase consumer electronics products that are pre-loaded with digital content. Not only are we skeptical about the potential for this vision to be realized, but we fail to see how Blockbuster has any competitive advantage in delivering content to these consumers.
BMO Capital Markets analyst Jeffrey Logsdon downgraded Blockbuster to Market Perform from Outperform, expressing concern that the acquisition could divert management focus from continuing the company’s turnaround.
We find it difficult to imagine that fighting what amounts to a two-front war will ultimately enhance value for BBI shareholders. Furthermore, we expect Blockbuster’s proposal to finance the deal with equity (at least in part) will pressure the stock’s valuation.
In an effort to make sense of the deal, Content Matters asks why struggling corporate CEOs always seem to think they could be more effective managing someone else’s turnaround company.