Blockbuster Inc. knows its future as a video rental chain has a limited run, and it's exhausting all viable options to turn around the company for long-term growth. But is its latest strategy, a bid in the range of $6 to $8 per share, or as much as $1.35 billion, for struggling electronics Circuit City Stores Inc. the right move? Probably not.
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The nation's largest video rental chain would only seem to be introducing another problem to its own woes. Falling behind No.1 Best Buy Inc., Circuit City did manage to make a slim profit in the fourth-quarter 2007, but prior to that its losses were at $207 million in the third quarter compared to a $20 million profit in the same year ago period. Meanwhile, with the economy slowing, Americans have less discretionary income to spend on items such as flat-screen TVs, digital cameras and other electronic goods, which would certainly weigh down Circuit City's already stagnant bottom line. Investors know this, abandoning Circuit City's stock, which closed down at $3.90 on Friday. That's a dramatic fall from its 52-week high of $19.22 April 16, 2007.
Blockbuster doesn't specify how it will pay for the deal, but having squeezed out just $39 million in 2007 on revenue of $5.5 billion; if it anticipates doing a deal with financing, it could be an extra-expensive proposition considering Blockbuster's $757 million long-term debt as of January 2008 and tightening credit markets.
In customary public relations speak, Blockbuster did say on the offer news it is: "uniquely positioned to capitalize on the growing convergence of media content and electronic devices. The transaction would allow both companies to benefit from the revenue growth generated by their complementary products, while the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value."
In other words, let's hope our customers buy our melded retail offerings because individually we believe we have no future flying solo. - Gerald Magpily
See TheDeal.com story on Blockbuster's bid
See Bloomberg article
