The movie-rental chain Blockbuster announced this week that it wants to buy Circuit City for more than $1 billion. What sort of movie would this be? A horror film? Maybe a romantic comedy?

Blockbuster CEO James Keyes said Monday that combining the companies would create a 9,300-store chain that could sell portable entertainment (DVDs) and the equipment to play it. (Read Keyes’ letter here.)

Circuit City responded by saying it doesn’t think Blockbuster can finance the purchase and has urged shareholders to sit tight and wait for more answers. Blockbuster countered by saying uber-rich board member Carl Icahn can pay for it if the deal has his blessing, which apparently it does.

Perhaps the biggest question on Richmonders’ minds is what’s the likelihood of a deal?

At this point, it’s hard to say. Wall Street pundits and analysts have mocked the potential merger, comparing it to the joining of two sinking ships. Blockbuster stock fell more than 10% on news of the offer. On the other hand, neither Blockbuster CEO Keyes nor billionaire investor Icahn rose to the top of the food chain by losing money. Icahn, in particular, has made billions buying undervalued companies, and he is likely the brains behind the Circuit-City offer.

In 2007 Forbes magazine wrote in a profile of Icahn, “Put simply, Icahn looks for companies that are screaming buys, meaning that the value of their assets far exceeds the total value of their shares, or market cap. In general he looks for hard assets like real estate, oil reserves and timberland that are relatively easy to value and resell.”

Chris Hutter, an associate at the Richmond private equity firm Virginia Capital Partners, said Circuit City is down, but still a good company. “They still have a lot of potential, and maybe Blockbuster is scooping them up while they’re cheap.”

Still, Hutter said he finds the combination of Circuit City and Blockbuster odd. “There may be some synergy in purchasing, but one is in the retail distribution of a product, and the other is in the rental service.”

Blockbuster’s proposal might trigger a bidding war for Circuit City – although it’s unclear who might want the struggling retailer. The days of high-priced acquisitions came to a screeching halt as liquidity used to fund such deals has dried up. It’s also possible that Blockbuster might be trying to use the potential deal to shift from its current business to a new one. The rental-chain company is a fast-dying brick-and-mortar business, and one that hasn’t adapted well to the web.

Robert Spekman, a professor of business at UVa’s Darden School of Business, said both chains would have to improve their current conditions or any deal that may go down would likely be a flop. Spekman added that large mergers are often less effective in the long-term than management predicts, and he remains skeptical of this deal in particular.

“If you shut Blockbuster stores and set up in Circuit City, does that mean more people go to Circuit City when they rent a movie, and then buy a microwave? I don’t think so,” Spekman said.

If the deal does go through, severe cuts at the headquarters could be likely as the new owner tries to extract value. That would be the case if Blockbuster combines Circuit City’s local operations with it existing operations in Texas. In a letter to Circuit City CEO Philip Schoonover, Blockbuster CEO Keyes wrote, “Both companies would benefit from complementary products, marketing, management strengths, technology and distribution.” Translation: axe jobs and save money.

A potential deal, at around $6 to $8 a share, is a mixed-bag for investors, including employees who have company stock in their retirement accounts. A sale locks in losses for investors who bought at prices above $8 a share. On the other hand, it prevents the stock from falling any more, including going to $0 a share.

A few other points to consider:

Firms that handle the logistics behind big moves such as this might have a huge potential client on their hands.

News of the hostile takeover – by a notorious corporate raider, no less – can’t help the already slumping morale at Circuit City. Some workers might head for the exits either because it’s time, or because they want to make sure they can find work in Richmond before mass layoffs flood the market. That was the case when Wachovia Securities announced it was pulling out of Richmond, according to a handful of former Wachovia analysts and the principals who scooped them up for other area firms.

Those same people could be left searching if they jump ship too soon, however, as the Blockbuster-Circuit City deal could fall by the wayside.

More reading:

Marriage of losers a worst buy, Denver Post
Blockbuster And Circuit City: Most Of You Are Skeptics, CNBC

Notify of
Inline Feedbacks
View all comments