Shares of Circuit City stocks rose dramatically this morning after it was announced that Blockbuster Inc. has offered to buy out the electronics retailer at about seven dollars per share. Curiously, Blockbuster shares have been down for the last several quarters, leaving many Wall Street analysts scratching their heads, wondering why the company would choose to go after Circuit City at this time.
Shares of Circuit City stocks were up by $1.40 per share this morning, while Blockbuster shares plummeted approximately 11%. It would seem that the word on Wall Street is that the takeover — if it happens at all — would be better for Circuit City that it would for Blockbuster.
The Dallas Business Journal is reporting that Blockbuster has offered $1 billion to buy out Circuit City. However Circuit City executives have voiced doubts about Blockbuster’s ability to raise one billion in capital or financing. The company is offering approximately seven dollars per share for a stock now trading at $3.90 per share (as of the 11th of April, 2008).
So far, Blockbuster has not revealed how they plan to raise the $1 billion offered to buy out Circuit City. Blockbuster CEO Jim Keyes said that the buyout proposal “offers Circuit City a significant premium to its existing stock price and create a game changing retail concept with a sustainable competitive advantage.”
Circuit City has been struggling over the last few quarters, reporting significant losses, and making the company an attractive prospect for “unsolicited” takeovers. If the Blockbuster deal were to be accepted, the combined company would have a street value of approximately $18 billion, and provide Blockbuster with nearly 700 electronics retail outlets in the US, and 779 and Canada.
Blockbuster, on the other hand, boasts 7,800 stores globally, with the majority of those being located in the North American market. The combination of Blockbuster’s retail video rental outlets with Circuit City’s electronics superstores would create a huge media and electronics company with nearly 10,000 retail outlets.
But it wasn’t so long ago that Blockbuster was struggling itself. The success of Netflix online video rental service caused Blockbuster to lose significant market share over the past four years. Most of those losses had been regained though, as Blockbuster introduced its own online film rental service to directly compete with Netflix, and bolster the sales of its existing retail outlets.
Buying out Circuit City for $1 billion would likely require a major restructuring of Blockbuster’s debt, and the deal would also need to be approved by the Securities and Exchange Commission. Circuit City is reportedly reviewing the offer carefully, but many analysts believe the company may have no choice other than to accept the buyout agreement.
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