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Blockbuster Halts Circuit City Purchase

Posted on: Wednesday, 2 July 2008, 18:00 CDT

By DAVID KOENIG

DALLAS - Blockbuster Inc. said it is withdrawing its proposal to buy Circuit City Stores Inc., the big-box electronics retailer whose sales have tumbled this year.

Both companies have stores in the Kanawha Valley.

Chief Executive James Keyes said Tuesday in a written statement that the proposed deal, at a price of more than $1 billion, didn't make sense because of market conditions. Blockbuster shares jumped nearly 12 percent on the news, while Circuit City shares continued their fall.

Blockbuster, the nation's largest movie-rental chain, will still try to merge content such as movies and games with the sale of electronic devices under one roof - but it will be at Blockbuster's own stores, Keyes said.

Circuit City Chief Executive Philip J. Schoonover said his board was still exploring strategies to help shareholders, which he said didn't require Blockbuster's presence.

The retailer's stock has dropped below $3 from its peak near $31 in May 2006, and the shares have lost about half their value since a one-day rally spurred by Blockbuster's bid. Blockbuster shares have fallen 20 percent since the bid was announced in April.

"Clearly Blockbuster shareholders didn't favor this deal," said Michael Pachter, an analyst with Wedbush Morgan Securities. "The company has done everything right since Jim Keyes took over, except making this bid. ... Circuit City's business is just plain in trouble."

Dallas-based Blockbuster had offered at least $1 billion for Circuit City and planned to create a 9,300-store chain.

Blockbuster went public with its offer after its initial overtures were ignored by Circuit City's board. Eventually, the Richmond, Va.-based company agreed to open its books to Blockbuster.

But the deal - a marriage of two companies that each lost money last year - was viewed with skepticism by many investors. Pressure on Blockbuster to walk away grew in June, when Circuit City reported that its loss tripled and same-store sales plunged 11 percent in the quarter that ended May 31.

It was a difficult period for other retailers too, but Circuit City's performance was worse than rival Best Buy Co., which saw its profit decline in the same period by 7 percent.

As of May 31, Circuit City operated nearly 700 U.S. stores and had 775 stores and dealer outlets in Canada. In its last fiscal year, it lost $320 million on sales of $11.7 billion.

Blockbuster has more than 7,700 stores worldwide. It lost $85 million last year on revenue of $5.54 billion.

The rental chain faces tough competition from the mail-delivery service of Netflix Inc. and cheap DVDs for sale at discounters such as Wal-Mart Stores Inc. Since Keyes was hired last year, Blockbuster has moved to cut costs and limit losses in its online service, Total Access.

Before news of Blockbuster's decision, shares in the movie- rental chain rose a penny to close at $2.51. In after-hours trading, they rose 29 cents, or 11.6 percent, to $2.80.

Circuit City shares fell 34 cents, or 11.8 percent, to $2.55 in regular trading - skidding to a 52-week low of $2.47 during the day. They dropped another 35 cents, or 13.7 percent, to $2.20 after- hours.

Source: Charleston Daily Mail

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