2008

As expected, Blockbuster Inc. on July 1, 2008 abandoned its bid to acquire Circuit City Stores Inc., nearly three months after it put forth an offer worth up to $1.4 billion and a week after analysts largely agreed a deal between the two was unlikely.

While Circuit City shareholder Mark Wattles maintained June 24 there were several interested bidders out there and news of a deal could come within a month, several analysts, according to reports, believed it wouldn't be with Blockbuster.

Richmond, Va.-based Circuit City reported June 19 a wider quarterly loss than was expected and said it would suspend its future dividend. The company also said it filed a shelf registration statement with the Securities and Exchange Commission to shore up reserves and confirmed its strategic review was ongoing.

Circuit City confirmed in May it hired Goldman Sachs & Co. to explore its strategic options and the company opened its books to Blockbuster and activist investor and Blockbuster's largest shareholder Carl Icahn. Circuit City also said it had settled a proxy contest with Wattles Capital Management to let the investor nominate a slate of three directors.

Meanwhile, shortly after the April 14 announcement, everyone had a take on it, including HBK Capital Management, an investor in both companies, which even suggested at the end of April it might help finance a deal.

The Deal's Michael Rudnick pointed out April 14 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:

Enter Icahn, who controls 11.8% of the votes at Blockbuster and sits on its board. Icahn, who owns 16% of Blockbuster's Class A shares and 7.7% of its double-voting Class B shares, told activist investor Mark Wattles that he would backstop a portion of a rights offering, Wattles said in an interview Monday. In recent months, Wattles' Wattles Capital Management LLC has built a 6.5% stake in Richmond, Va.'s Circuit City and has been pressing it to put itself on the block. (See a related Dealwatch for more.)

Meanwhile:

• Dealscape's John Blakeley wondered whether a Circuit City deal would detonate Blockbuster's ticking time bomb.
• Dealscape's Matt Wurtzel compared a Blockbuster-Circuit City tie-up to Eddie Lampert fusing Sears, Roebuck & Co. with Kmart Holding Corp. in 2005: All four are has-beens and have reputations for poor customer service.
• Corporate Dealmaker's Ken Klee argued Blockbuster's "Icahn-endorsed bid for Circuit City smacks of the top-down approach to dealmaking that has failed so often in the past."
• Dealscape's Gerald Magpily suggested where he thought Blockbuster was coming from: "Let's hope our customers buy our melded retail offerings because individually we believe we have no future flying solo."

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. In August, however, it struck a licensing deal with NCR Corporation (NYSE: NCR), a global leader in self-service and assisted-service technology, to deploy Blockbuster-branded DVD vending kiosks in a pilot program that could be the first step of a national rollout of thousands of units. (See how that pans out here)

Here's a look at the last several months:

• The company rolled out its Blu-ray campaign nationally April 10.
• As Reuters noted March 6, Blockbuster reported better than expected results for its fourth quarter, marking its first quarter of profitability in a year.
• Earlier in March, Blockbuster inked a two-year exclusive rental agreement with IFC Entertainment.
• Kicking off January, Netflix said it would team with LG on a set-top box to let users stream video from the Web directly to their TVs. Weeks later the company reported a higher fourth-quarter profit. Reuters noted the company ended the quarter with nearly 7.5 million subscribers -- in line with its range, but below some estimates. (Blockbuster, meanwhile, had 3.1 million subscribers at the end of its third quarter, Reuters noted.)
• Blockbuster said Dec. 20 it would raise prices for its Total Access online business between $2 and $10 per month, weeks after saying it would experiment with its pricing models and store formats.
• Blockbuster reported a wider third-quarter loss Nov. 1 -- $35 million compared with $24.7 million a year earlier -- amid store closures, a cost-cutting campaign marked by job cuts and plans to streamline operations, Reuters noted.
• Blockbuster saw several management changes last summer and fall.

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:

• the sale of its U.K. specialty games retailer Games Station Ltd. U.K.-based the Game Group plc, for nearly $150 million in cash
• the sale of its Movie Trading Co. and Movie Brands Inc. subsidiary
• the shuttering of its retail locations in Spain
• the divestiture of its Taiwanese subsidiary and master franchise license to Chinese broadband operator Webs-TV
• the sale of its Rhino Video Games retail chain to GameStop Corp.
• the signing away of the licensing rights and its Brazilian retail locations to Lojas Americanas
• and an agreement to sell its Australian subsidiary and franchise rights for the brand in Australia to Video Ezy

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?