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Blockbuster Inc. went public April 14 with news it had proposed to acquire ailing retailer Circuit City Stores Inc. for up to $1.4 billion. Shortly thereafter, everyone had a take on it.
The Deal's Michael Rudnick pointed out the $6 to $8 per share offer, even with a nil-premium, could still put the squeeze on Blockbuster and its balance sheet with $185 million in cash at the end of its fourth quarter. The company indicated it would likely undertake a rights offering to pay for the deal, given the tight credit markets. Rudnick wrote:
Meanwhile:
Blockbuster, meanwhile, which for years has struggled with on-demand media offerings and upstart online DVD rental group Netflix Inc., lost $85.1 million in the year ended Jan. 6 and foresees net income between $5 million and $25 million for 2008, as it cuts back on advertising and grows its own online operations, Rudnick noted. Here's a look at the last several months:
THE ONLINE GAME Blockbuster clinched a key piece of that online business in August 2007. The Dallas-based movie rental giant said it would acquire movie download company Movielink LLC for undisclosed terms, but which the Wall Street Journal called less than $20 million -- five months after a source confirmed for The Deal's Richard Morgan that it was in the works. The deal counters (and, in a way, one-ups) a download service Netflix debuted in January 2007. As it continues to battle Netflix, Blockbuster unveiled expanded online subscription offerings in July. The Movielink deal marked the most recent acquisition for Blockbuster, as it tries to broaden its business beyond the in-store rental model. It didn't mark a shift in strategy, The Deal's David Shabelman pointed out, given Blockbuster's maneuvers to hammer Netflix by undercutting its prices. FEAR AND LOATHING In late July, the company reported a second quarter 2007 loss of $35.3 million, or 20 cents per share, down from a profit of $68.4 million, or 31 cents per share, a year earlier. According to a Reuters report, the numbers stem from a drop in in-store revenue and higher spending on online DVD rental, while the company planned to curb losses by restricting free in-store rentals and charging a $1.99 fee for additional rentals and offering the $1.99 in-store rental price to its mail subscribers, whose fees only cover online rental. Meanwhile, Netflix, brought suit against Blockbuster in April 2006 in an effort to shut down the retailer's then-18-month-old online store, alleging it knowingly infringed on Netflix's patents. In response, Blockbuster brought a counter-suit. The two settled in July. Historically dogged by the uber-popularity of Netflix, Blockbuster in November 2006 launched its Total Access program, which enables customers to rent online, return DVDs by mail or exchange them in-store for free rentals. Blockbuster has also, on occasion, overtly appealed to Netflix customers through its ability to circumvent its competitor's biggest obstacle -- reliance on the U.S. Postal System. Blockbuster has offered Netflix subscribers on occasion the opportunity to exchange their Netflix mail-delivery envelopes to Blockbuster and in exchange get free rentals. It now offers an in-store exchange service for Blockbuster's online video and game customers. The company, which Viacom wooed in 1994 for $8.4 billion in stock and spun off 10 years later, has recently braved issues over the years related to growth and competition. Icahn pushed for a sale of the company in 2005 and didn't get it, but won a board seat. Around the same time, the company withdrew its hostile, $929 million bid for Hollywood Video parent Hollywood Entertainment Corp., which paved the way for the target's agreed to $849 million sale to Movie Gallery. At the time, Icahn criticized chief executive John Antioco for enabling a competitor. The Hollywood deal, it turned out, would cripple Movie Gallery. The No.2 video rental chain after Blockbuster, filed for Chapter 11 in October and its plan to emerge was confirmed April 9. (For more, see a related Dealwatch.) DIRECTOR'S CUT Blockbuster has also been trimming its portfolio through mid-2007. Its slim-down has included:
Blockbuster has proved itself a force to be reckoned with and notably agile despite late online market entry. But is it now going back to its brick and mortar roots with a plan for Circuit City. And can it work? --Carolyn Murphy
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