M&A

Blockbuster Battle Looms for Circuit City

Movie-rental firm's $1.3b hostile offer gets icy response, as target questions the bidder's financial wherewithal.
Stephen TaubApril 14, 2008

Blockbuster, seen by many as a company with financial problems of its own, has proposed to acquire Circuit City Stores Inc. with a hostile bid of as much as $1.3 billion.

In responding that it will carefully consider and evaluate the movie rental chain’s unsolicited proposal, Circuit City asserted that Blockbuster has been unable to satisfy Circuit City and its advisors that the plan could be financed. The Blockbuster plan, the target said, “appears to contemplate a rights offering of unprecedented size relative to the issuing company’s market capitalization and at a price that is at a significant premium to Blockbuster’s current market price.”

The electronics retailer added that its advisors have noted that most rights offerings, of which there have been very few in the United States, occur at discounts to market.

Blockbuster made the offer in a letter from Chairman and CEO Jim Keyes to Circuit City Chairman and CEO Philip Schoonover on Feb. 17. It publicly disclosed the offer on Monday. “Unfortunately, to date, Circuit City has failed to provide due diligence necessary to allow Blockbuster to make a definitive proposal,” Blockbuster said in a press release.

“Blockbuster is making its proposal public because it believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company,” it added. “In addition, as Blockbuster has other strategic opportunities, its offer is conditioned upon timely commencement of the due diligence process.”

Keyes said the company was prepared to make an all cash offer in the range of $6 to $8 per share, subject to due diligence.

This would result in an $18 billion global retail enterprise which aims to “capitalize on the growing convergence of media content and electronic devices.” Blockbuster explained that the deal would allow both companies to benefit from the revenue growth generated by their complementary products, while the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value.

“We would seek to differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices,” Keyes stated in his letter.

Keep in mind that one of Blockbuster’s largest shareholders is billionaire corporate raider and activist investor Carl Icahn.

Investors, however, seemed skeptical, with Blockbuster’s shares down nearly 11 percent at midday. Circuit City stock surged 30 percent, suggesting that investors think the electronics retailer is in play and may receive a higher bid from another company.

“Overall, I strongly believe that a combination of Blockbuster and Circuit City would deliver significant value to our respective shareholders, enhance the overall customer experience, and energize our employees,” Keyes said in the letter.

Circuit City said in its response that it has a number of other fundamental questions about the structure, sources, and uses of funds and consents required in the proposed transaction.

Among those questions are whether an acquisition would require refinancing of existing Blockbuster debt, and if so, what would be the terms and structure of any new debt? It also questioned how large a rights offering would be required to fund the transaction, and what steps Blockbuster has taken to provide a backstop to ensure successful execution of the rights offering contemplated. Further, it questioned what precise internal and external approvals Blockbuster anticipates for a proposed transaction, including approval of the contemplated rights offering by Blockbuster shareholders and registration of the offering with the Securities and Exchange Commission.

“While willing to engage in discussions to further understand Blockbuster’s proposal, having shared certain information with Blockbuster, Circuit City is unwilling to provide Blockbuster with additional detailed due diligence information and embark on a highly conditional undertaking until these questions are answered satisfactorily,” it added.

Blockbuster has had a number of problems, only one of them having to contend with the long-expected competition from video-on-demand.

In March, Blockbuster Inc. said it will restate its 2005 and 2006 consolidated financial statements, and its quarterly reports for 2006 and 2007, to correct certain errors. As a result of the errors — leading to revisions that will impact income from continuing operations — the company said that it will report in its annual report for the year ended Jan. 6, 2008, that two material weaknesses exist in its internal controls over financial reporting.

The weaknesses are related to accounting for general and administrative expense accruals and accounting for foreign currency translation adjustments.

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