Hey Blockbuster, Still Want To Buy Circuit City?

There haven’t been a lot of developments in the last few weeks on Blockbuster’s (BBI) $6-a-share bid for Circuit City (CC). The stock certainly isn’t trading like a company in play; the Street doesn’t seem to think anything is going to happen.

Arvind Bhatia, an analyst with Sterne Agee, asserts in a research note this morning that Blockbuster is likely to provide an update on its proposed transaction in the next two weeks. He sees three possible outcomes:

• Blockbuster proceeds with its bid.
• Blockbuster lowers its bid.
• Blockbuster pulls its bid.

Given the still troubled financial picture at Circuit City, Bhatia thinks the odds that the company pursues a deal at $6 a share is just 5%.

He sees a 60% chance that Blockbuster lowers its bid. At $4.50 a share, he writes, CC would have an enterprise value of $750 million. Bhatia says financial synergies from a deal could be $500 million to $700 million, which means BBI could argue that they would be buying CC at 1x synergies. (Haven’t ever seen that ratio before.) Nonetheless, he thinks that BBI holders “will need to be convinced there is more to the combination” than cost cutting: they will want to hear a plan for turning CC around.

He also sees about a 35% chance that BBI simply walks from the deal.

Comments

[Gautam]

Anyone else think the time is ripe for shorting CC?

[michael6296]

There are 2 likely scenarios. 1) It's time to short. at least a segment of the customer base that knows what is going on will move their business to others like BBuy. Why risk availability of after the sale service form a dieing company. 2) Wait a while. If I was Bbuster, I would wait for another restructure that has to happen, closing more stores etc. Wait for the results and acquire/bid for a lighter weight company with fewer "pig" stores.

After CC lowered sales force compensation, they lost their best people, their identity and niche in this highly competitive market. Before the move, I gladly paid more for the advice of higher skilled, more knowledgeable sales people. Not now. For betraying their brand, the company will die a slow death. Too bad we cannot get back the executive incentive compensation we paid those boobs who developed and approved the failed strategy. Hey Eric, why don't you and SA create a black list of executives with failed strategies, those that destroyed significant shareholder value or worse, like CC, killed companies? Then report to us on where they landed! Then I could avoid buying the hiring company's stock. Let's keep these bums out of public company leadership roles!

[billddrummer]

To michael6296,

When BBI completes its due diligence, it will probably find that closing half the CC stores is the best way to bring the company back from the dead. I'd guess that about 50% of the existing stores underperform. If you close those, the remaining locations would be good to keep.

Makes you wonder though--couldn't the CC management do the same thing?