When this was first emailed to me I thought the emailer was being a smart a#@. Turns out it is true. How? Why? Haven’t shareholders suffered enough? Why does management hate them so much?
Blockbuster (BBI) said it made a $1 to $1.3 billion cash offer in a Feb. 17 letter to Circuit City (CC) Chief Executive Philip Schoonover. They decided to go public with the offer Monday after Circuit City did not provide access to its books. (Read the letter.)
Circuit City said today of Blockbuster they had “reservations as to their ability to finance the offer.” Considering that as of January Blockbuster only had $184 million in cash on the books, they are only $1 to $1.12 billion short of the stated goal.
In the letter Blockbuster CEO Jim Keyes said, “Given current debt market conditions, we believe most of the cash necessary would be generated through the issuance of additional Blockbuster equity, most probably in a rights offering to our existing shareholders. We believe they, and the market, will recognize the merits of this transaction and we are confident that we can raise the required equity. The borrowing capacity of the combined business would provide the remaining cash proceeds.”
They’ll have to essentially dilute shareholders to the max and then raid the credit line CC set up in February to fund the deal since banks are not loaning money for deals that make sense much less one that means a struggling retailer barely making a profit buying one that isn’t.
The larger issue is, what is Blockbuster trying to become? They have a valuable franchise in video if they would just realize the video store concept is officially dead. Adding more brick and mortar locations, diluting shareholders and maxing out the credit line to acquire another problem is a huge mistake.
Keyes said “The combination of Blockbuster and Circuit City will result in an $18 billion retail enterprise uniquely positioned for the convergence of media content and electronic devices. We would seek to differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices. Both companies would benefit from complementary products, marketing, management strengths, technology and distribution and the resulting synergies would significantly improve consolidated financial performance.”
He has mentioned this vision before but it has yet to be rolled out in Blockbuster locations, why bet the farm on a wholly unproven concept? He talks about “differentiating products” in both locations. That is confusing because I was not aware of any similarities currently. Let’s also be real honest here. Using the term “management’s strengths” and either Blockbuster or Circuit City in the same sentence is laughable unless it is preceded by “lack of”.
Now, were RadioShack (RSK) to make a run a CC, that would make sense. Borders (BGP) and Barnes and Noble (BKS) does. This doesn’t on any level.
Maybe Keyes is officially throwing on the towel in the war with Netflix (NFLX) and has decided to try a new direction?
Circuit City shareholders should jump at the price because they won’t see $6 to $8 a share anytime soon, this will destroy Blockbuster holders…
Disclosure (“none” means no position):Long BGP, None
Visit the ValuePlays Bookstore for Great Investing Books
This work is licensed under a Creative Commons Attribution 2.5 License.
One reply on “Are You Kidding? Circuit City (CC) and Blockbuster (BBI)?”
Todd, I’m with you! As I note on my own blog (www.ritamcgrath.com), this desperate move doesn’t make sense to me. The dilemma for Blockbuster is a familiar one – failing to invest in enough options to offer alternative business models if the core fades away. And it’s not as though they haven’t had plenty of time – the video rental business has been in trouble for quite a while.