Blockbuster Offers to Buy Circuit City

[Woochifer]

Kind of a head scratcher of a deal here, and Blockbuster's stock has been getting pounded since the announcement. Basically, this is a hostile takeover bid and sounds like corporate raider Carl Icahn (who sits on Blockbuster's board) is the force behind Blockbuster's bid. The value of Blockbuster's bid amounts to $1.35 billion, and Blockbuster has a total of less than $200 million cash on hand.

http://www.marketwatch.com/News/Story/blockbuster-offers-buy-circuit-city/story.aspx?guid=%7BEABF4D46%2D9F05%2D47C3%2DB564%2 DDC918B81BF74%7D

This comes less than a week after Blockbuster announced that they were developing a set-top media downloading device to compete with Apple TV. That too seems like a questionable move, given that Apple TV (or any other networked media player for that matter) hasn't exactly set the sales charts on fire.

Combination of two struggling retail chains seems puzzling. I suppose there are cross-marketing opportunities, but I don't see shoppers going to Circuit City to rent videos, nor heading over to Blockbuster to shop for electronics. But, Blockbuster wants to make it happen, so we'll see where this goes and what collateral damage Circuit City takes if they choose to fight the takeover bid.

[kexodusc]

This is a strange move indeed. Usually when odd ball M&A's like this pop up we look for a couple of things:
1) What's on the balance sheet of the target? Is there a distribution network, license, or real estate of any kind Blockbuster wants?
2) Is there a plan of some sort for an industry changing product or service? Ie, the marriage of hardware sales with discount video rentals or something? Or my speculation...something more profound in the video game industry???

Or does Icahn see a company with loads of potential seriously undervalued because of short term circumstances? Bad economy, rough time in the last cycle, but an otherwise capable company... If they can get this company for $6/share and in a few years get back to anywhere near $19, they've done ok....

Weird. Must be nice to just try and buy your way out of hardship though.

[filecat13]

Well, when CompUSA bought out Good Guys, I saw two really fat guys trying to get on one small life raft. All the dieting in the world didn't keep the raft from sinking and taking both of them down, unless you count a pi$$-poor e-tail site as CompUSA's master survival plan.

With Blockbuster/CC, I don't see any lifeboat at all, just a big fat guy trying to climb on top of another fat guy who only knows how to dog paddle.

Good news for Icahn, though: sometimes when big bodies drown and sink, they slowly bloat up with putrefying gas and float back to the surface even bigger than when they went down. Yum! Big floaters.

:21:

****No offense intended to those of us who are 30 pounds or more overweight. It's just a frickin' illustration.****

[pixelthis]

CC has been mismanaged lately, and maybe block thinks they can create a purse outta a sows ear.
Blockbuster is in trouble. Their business model is obsolete, and they see the handwriting on the wall.
Today its netflix, downloads, and five hundred channels on the dish or cable.
people arent going to burn the gas or time to ride down to the video store,
and then have to come back.
AND on top of that you now have to turn in the new rental the next day.
Rent one new and an older and you wind up making TWO trips back.
THis is the opposite of what they needed to do.
Blockbuster is screwed, about as bad as buggywhip makers when cars came on the scene.
Well, if they buy CC, then they can both crash and burn TOGETHER.
These companies might actually be a good match, they are both doing stupid and suicidal things that are guarenteeing their demise.
Maybe it will be cheaper to liquidate them when they are together as opposed to liquidating them both seperately:1:

[Woochifer]

This is a strange move indeed. Usually when odd ball M&A's like this pop up we look for a couple of things:
1) What's on the balance sheet of the target? Is there a distribution network, license, or real estate of any kind Blockbuster wants?
2) Is there a plan of some sort for an industry changing product or service? Ie, the marriage of hardware sales with discount video rentals or something? Or my speculation...something more profound in the video game industry???

Or does Icahn see a company with loads of potential seriously undervalued because of short term circumstances? Bad economy, rough time in the last cycle, but an otherwise capable company... If they can get this company for $6/share and in a few years get back to anywhere near $19, they've done ok....

Weird. Must be nice to just try and buy your way out of hardship though.

The only connection I can think of is Blockbuster's announcement last week that they would develop a set-top box to compete with Apple TV. Circuit City would obviously provide them with a distribution channel for that device and any other consumer electronics or media ventures that they might be looking into. CC would also give them a brand that they can use to set aside floor space at Blockbuster stores for electronics and other non-rental sales. With video rentals beginning to erode, Blockbuster either needs to give people new reasons to visit their 5,000+ stores or start shutting them down.

CC's stock value before the announcement was less than $1 billion, which seems rather low given that CC's total sales last year were over $12 billion (Blockbuster's sales last year totaled $5 billion, don't know their cap value). The Wikipedia entry for CC also indicates that they hold a lot of real estate from their various expansions, relocations, and store closures over the years. That might be what caught Icahn's eye, given his track record of acquiring companies and then selling off their assets piece by piece.

[Woochifer]

Well, when CompUSA bought out Good Guys, I saw two really fat guys trying to get on one small life raft. All the dieting in the world didn't keep the raft from sinking and taking both of them down, unless you count a pi$$-poor e-tail site as CompUSA's master survival plan.

With Blockbuster/CC, I don't see any lifeboat at all, just a big fat guy trying to climb on top of another fat guy who only knows how to dog paddle.

Good news for Icahn, though: sometimes when big bodies drown and sink, they slowly bloat up with putrefying gas and float back to the surface even bigger than when they went down. Yum! Big floaters.

Actually, Good Guys was operating profitably by the time CompUSA got involved. GG had a string of previous losses, which put their stock price underwater and made them a prime takeover target. CompUSA had already gone private a few years before, and I found the cobranding of CompUSA and Good Guys bizarre. Good Guys had already retrenched and seemed to find a decent niche catering to the higher end of the market and eliminating as much product overlap with BB and CC as possible. CompUSA's owner down in Mexico had a lot of ambitious ideas, and Good Guys seemed the logical avenue to get there.

They were trying to copy Best Buy's successful integration of the higher end Magnolia Hi-Fi chain. But, CompUSA's problem was that their stores didnt get anywhere near Best Buy's foot traffic, even after CompUSA started carrying DVDs and video games. And I thought that Good Guys lost its focus on the higher end and higher margin markets after CompUSA took over. They got mismanaged into the ground.

[kexodusc]

The only connection I can think of is Blockbuster's announcement last week that they would develop a set-top box to compete with Apple TV. Circuit City would obviously provide them with a distribution channel for that device and any other consumer electronics or media ventures that they might be looking into. CC would also give them a brand that they can use to set aside floor space at Blockbuster stores for electronics and other non-rental sales. With video rentals beginning to erode, Blockbuster either needs to give people new reasons to visit their 5,000+ stores or start shutting them down.
This would suggest a profound business model shift on some scale for Blockbuster - in home service rather than drive-to-the-store service. Now they're fighting Apple and possibly cable companies with way more money. Still, if it works...


CC's stock value before the announcement was less than $1 billion, which seems rather low given that CC's total sales last year were over $12 billion (Blockbuster's sales last year totaled $5 billion, don't know their cap value). The Wikipedia entry for CC also indicates that they hold a lot of real estate from their various expansions, relocations, and store closures over the years. That might be what caught Icahn's eye, given his track record of acquiring companies and then selling off their assets piece by piece.
I dunno, the $12 billion isn't shocking, I don't think big box consumer electronics are high margin any more now that everything is commodified. It's entirely possible that the liquidated value of assets can exceed the share price though. I've seen it happen. Try telling that to a Board of Directors. "Your business plan and strategy sucks so much, that we think we'll make more money selling your office furniture and buildings than your products in the future!"

[filecat13]

Actually, Good Guys was operating profitably by the time CompUSA got involved. GG had a string of previous losses, which put their stock price underwater and made them a prime takeover target. CompUSA had already gone private a few years before, and I found the cobranding of CompUSA and Good Guys bizarre. Good Guys had already retrenched and seemed to find a decent niche catering to the higher end of the market and eliminating as much product overlap with BB and CC as possible. CompUSA's owner down in Mexico had a lot of ambitious ideas, and Good Guys seemed the logical avenue to get there.

They were trying to copy Best Buy's successful integration of the higher end Magnolia Hi-Fi chain. But, CompUSA's problem was that their stores didnt get anywhere near Best Buy's foot traffic, even after CompUSA started carrying DVDs and video games. And I thought that Good Guys lost its focus on the higher end and higher margin markets after CompUSA took over. They got mismanaged into the ground.


And I think GG could have survived if it could have stayed on its raft alone. I bought enough gear there over the years, but when CompUSA crowded aboard it threw overboard everything I went to GG to see.

[pixelthis]

MY understanding is that CC will have electronics with a small booth for rentals, and Blockbuster will have rentals with some electronic offerings.
The difference I cant see.
this is the result of a boardroom meeting that seemed good at the time but appears to be drug influenced loonies to others.
ONE THINGS SURE, both are heading out the door and grasping at straws:1:

[bobsticks]

I dunno, the $12 billion isn't shocking, I don't think big box consumer electronics are high margin any more now that everything is commodified. It's entirely possible that the liquidated value of assets can exceed the share price though. I've seen it happen. Try telling that to a Board of Directors. "Your business plan and strategy sucks so much, that we think we'll make more money selling your office furniture and buildings than your products in the future!"

Exactly. This is a great deal for Phil Schoonover on his way out the door. Clearly, no proactive individuals have been at the helm of either company for years so now it's slash and burn time. Great way to make a bonus without ever leaving the golf course.

[drseid]

Definitely seems like a strange combo to me as well. As many have already said, two struggling companies that would appear to be in an even weaker position as a combined entity.

Carl Ichan is certainly a talented guy, and if he is pushing for this there must be a good reason (i.e. he sees a good deal of money at the end of the rainbow)... but I think he may be on the losing end this time. I just don't see any real synergies with these two. Hey, even talented guys make bad decisions from time to time...

---Dave

[Woochifer]

Definitely seems like a strange combo to me as well. As many have already said, two struggling companies that would appear to be in an even weaker position as a combined entity.

Carl Ichan is certainly a talented guy, and if he is pushing for this there must be a good reason (i.e. he sees a good deal of money at the end of the rainbow)... but I think he may be on the losing end this time. I just don't see any real synergies with these two. Hey, even talented guys make bad decisions from time to time...

---Dave

If Icahn is bankrolling the takeover, he probably sees things on the balance sheet, like Kex pointed out, that would allow them to still make money even if the acquisition results in them liquidating the company. I think Blockbuster's got a lot of ideas that they want to try, and CC might help some of those ideas stick. CC might simply turn into a distribution arm for Blockbuster's forays into digital media devices and other services. And Blockbuster stores might allocate more of their floor space to promoting electronics, Firedog services, and cell phones.

The end result very well might be Blockbuster stores looking more and more like Radio Shack, and everything linked over to the closest Circuit City locations.

[bobsticks]

The end result very well might be Blockbuster stores looking more and more like Radio Shack, and everything linked over to the closest Circuit City locations.

Hey Wooch, I'll bet ya an e-beer that within two years both companies no longer exist.

Hell, give me 36 months and I'll make it a real beer. I will fly out to the left coast and buy you your choice of brews if either of companies exist within 36 months.

[thekid]

I tend to agree with Pix on this. Blockbuster's business model is dying and there maybe some idea of using some of the vendors/hardware available through CC to somehow create a new model/market for Blockbuster. Not sure how that would work. The other comments about possibly people buying CC for the hidden assets is a very real possibility.

The two company names in Berkshire-Hathaway were from a farm implement company and shirt company respectively. Buffet bought them not because of their main operations but other assets that he could use.