The Circuit City Train Wreck: Kudos to Blockbuster for Walking Away

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Includes: BBI, CCTYQ
by: Markham Lee

Yesterday Blockbuster (BBI) did the right thing by walking away from the train wreck that is Circuit City (NYSE:CC); after all what does sense does it make sense to invest in a failing business when your own company is struggling to make money.

From the Financial Times:

SAN FRANCISCO, July 1 - Blockbuster Inc on Tuesday abandoned its offer to buy electronics retailer Circuit City Stores Inc, after weeks of investor speculation that the deal was falling apart.

Shares of the video rental chain jumped 15 per cent on Wednesday in reaction to the news. Circuit City’s shares opened 16 per cent lower, after declining nearly 12 per cent at Tuesday’s close.

Blockbuster’s Chief Executive Jim Keyes cited ”market conditions” as a reason for withdrawing the offer, valued at up to $1.3bn, and said the deal was not in the best interests of its shareholders.

Blockbuster in April disclosed that it had offered to buy Circuit City in February for $6 to $8 a share, or up to $1.3bn.

Circuit City issued a statement soon after, saying its previously announced exploration of strategic alternatives is ”active and ongoing,” and that the process is independent of Blockbuster’s participation.

...investor Mark Wattles -- whose firm, Wattles Capital Management, has gained seats on Circuit City’s board -- told Reuters last month the company had received buyout interest from several bidders other than Blockbuster.

Circuit City’s Chief Executive Philip Schoonover said in a statement the retailer is ”diligently working with the parties involved in the process.” The board has not set a deadline for completing its review, he said.

Blockbuster’s Keyes said his company, which is in the middle of turnaround efforts, continues to believe in the ”strategic merits of a consumer retail proposition that would bring media content and electronic devices together under one brand.

Needless to say, I'm 100% behind Blockbuster's decision, because I've always thought that if Blockbuster wants to combine content & electronic devices it should either built that business from scratch and/or via buying small regional retailers. From a cost and effort perspective, either option is probably a lot more efficient than buying a failing business, then turning it around and integrating it into your core operations; especially when your core business is in need of it a turnaround of its own.

But there is a big problem facing Blockbuster and its plan to integrate content and hardware: it's nothing new or innovative, and they face several competitors that are already quite successful at selling media and electronic devices.  When consumers want to buy media and/or electronic devices they typically think of retailers like Best Buy (NYSE:BBY), Target (NYSE:TGT) or Wal-Mart (NYSE:WMT), they're generally not going to Blockbuster. As a result Blockbuster has to rise up against competitors that are already beating it at the media content game, and begin competing with them in a new and unfamiliar arena at the same time.

All that being said it's still going to be easier for Blockbuster to do this on its own or with the help of small (but profitable) partners, then it would be to try and compete against the likes of Best Buy with a competitor (Circuit City) that Best Buy has already vanquished.

As for Circuit City, I say it's just a matter of time before the current management team is either fired, the company collapses, and/or the buyout offers comes from a company that just intends to liquidate the retailer A' La CompUSA. When a company is unable to make money despite selling a nearly identical (and similarly priced) product line as its competitors, and management continues to talk as if things are getting better despite evidence to the contrary, it's safe to say that the company's days are numbered.

At this point, there is really nothing else to say on the subject.

Source: The Financial Times: "Blockbuster abandons Circuit City acquisition" -- July 1, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

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