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Circuit City Opens Books to Blockbuster

Posted on: Saturday, 10 May 2008, 09:00 CDT

Circuit City Stores Inc. on Friday gave in to pressure from activist shareholders, essentially putting itself up for sale and agreeing to nominate dissident directors to its board.

The electronics retailer announced it would open its books to Blockbuster Inc. - as well as Blockbuster's largest shareholder, Carl Icahn. It did so after Icahn defused concerns over whether Blockbuster could finance the deal by saying he was prepared to buy the company if all else fails.

Circuit City said Icahn's letter answered some questions related to the potential transaction and that it would allow the video- rental chain to conduct due diligence in its takeover bid of just more than $1 billion with plans for creating a huge chain that would sell electronic gadgets and rent movies and games.

Friday's moves by the Richmond company, including hiring Goldman Sachs & Co. to explore strategic alternatives, eased some lingering concerns over Circuit City's financial future, helping its stock climb in trading.

Shares of Circuit City jumped 28 cents, or 5.9 percent, to $5.07, while Blockbuster's stock fell 2 cents to $2.66.

"The board is taking its fiduciary responsibility to its shareholders seriously," said Circuit City spokesman Bill Cimino. "These actions today, the board felt, were in the shareholders' best interest."

But Chief Executive Philip J. Schoonover cautioned about reading too much into the current state of the discussions, saying the board has "confidence in the company's ability to successfully implement its turnaround plan."

In a statement Friday, Blockbuster said that it was pleased to reach a due diligence agreement with Circuit City.

"While it is our hope that the due diligence process will reinforce both the strategic and financial rationale behind the deal, we are committed to only doing a transaction that provides substantial benefits for our shareholders," the Dallas-based company said.

While a sale of the company to Blockbuster or others isn't necessarily inevitable, Circuit City is going to have to make a better case that it is still viable and stave off pressure from shareholders, said BMO Capital Markets analyst Rick Weinhart in an interview.

"This is going to require some either bold actions by management to change the direction of the business here shortly, or there's going to have to be some other strategic direction," Weinhart said.

Circuit City also defused a proxy battle with Wattles Capital Management by agreeing to put three of its board nominees up for election at its annual meeting in June.

"I didn't feel compelled to settle. I settled because it was so obvious that the board interest was in fact aligned with mine and the other large shareholders," said Mark J. Wattles in an interview. "Once I was convinced of that, settlement was obvious."

The owner of the 32-store Ultimate Electronics chain has criticized Circuit City's turnaround efforts, placing blame on Schoonover and asking for him to be replaced.

impact of the news

Shares of Circuit City jumped 28 cents, or 5.9 percent, to $5.07, while Blockbuster's stock fell 2 cents to $2.66.

Source: Virginian - Pilot

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