Credit Suisse Disagrees with Citi on Blockbuster / Circuit City Deal

Blockbuster’s (BBI) proposed acquisition of Circuit City (CC) could be a huge hit, if you believe Citigroup’s Tony Wible.

Today, Wible lays out an eye-opening thesis on why the deal makes sense. He contends that post-acquisition Circuit City stores would likely look far different. He expects the stores would be overhauled to “drastically improve the in-store experience while boosting entertainment sales.” Overlapping stores would be combined into larger Circuit City stores, he says. Non-entertainment SKUs - they sell appliance, for instances - would be phased out. He expects new initiatives, like “beverage and video game lounges and kid zones.”

Wible thinks a deal can generate incremental EBITDA of $433 million in 2008 and $571 million in 2009. If the combined company was valued at 4x EBITDA, he says, the stock could hit $8. And if the market gave BBI a multiple of 5.1x granted other retailers, the stock would be worth almost $11, he says. Wible maintains a Buy rating and $8 price target on the stock.

Credit Suisse’s Gary Balter is much more cautious on the prospects for a deal. “Would an investor as smart as [Carl] Icahn want to put what could amount to $1 billion to buy into a chain that has some cash and a nice credit line, but is also sitting, based on management’s own admission, with a store base that includes nearly two-thirds of stores they would rather not be in?” he asks. “In a consumer spending environment that it likely to get worse in the near term, is buying into a company that is already projecting negative EBITDA a good investment? We are struggling to understand the so-called synergies and convergence that a merger with BBI provides.”

Balter’s take: “We continue to doubt that this shotgun wedding will occur.”

Comments

[billddrummer]

I think $11 is too generous, but $6-$8 is reasonable if the company stays intact. The breakup value if you factor in the value of expiring leases in good locations is probably higher, but that would point to a hedge fund type buyout, not the BBI/CC combination currently on the table.

I agree with the Credit Suisse analyst that synergies are largely illusory, and would be extremely difficult to implement given the widely divergent cultures in the companies. CC appears to act like a wounded animal that's dangerous when cornered; BBI is actually attempting to remake its business model in response to changes in the marketplace.

If it does happen, the new company will be more like RadioShack than CC.

[LarryEllison]

if not BlockBuster, I will buy CC and will keep it as a side Hobby.
What do you people say ?

[daffy]

Larry,

I think even I, a tiny little high-end woodworker, could run CC better than current management.

Atrocious.

I am sure you could do much better as well, let alone Icahn.

[billddrummer]

If Icahn ends up with the company, he'll probably leverage it to the hilt and sell off chunks of it to repay the debt.

If BBI ends up with it, Keyes will leverage it to the hilt and be forced to sell off chunks of it to repay the debt.

No real difference, except that there will be more debt to repay with BBI than with Icahn.