- The Washington Times - Tuesday, April 15, 2008

Blockbuster Inc. wants to acquire Circuit City Stores Inc. to create what the movie rental chain says would be a “game-changing” retail concept featuring technical support kiosks in Blockbuster stores and rental services at Circuit City.

Dallas-based Blockbuster in February said it would pay as much as $1.35 billion for the nation”s second-largest electronics retailer, which has been trying to turn itself around after sagging sales and strong competition from Best Buy Co. Inc. A combined company would have an edge over competitors who sell either content or electronic devices by providing both, Blockbuster said.

The deal would result in an “integrated suite of products with the flexibility and the convenience that our peers simply could not match,” Jim Keyes, Blockbuster”s chairman and chief executive officer said yesterday on a conference call with research analysts and reporters.

The company went public with its offer, made in a Feb. 17 letter to Circuit City Chairman and Chief Executive Philip Schoonover, as a direct appeal to shareholders after Richmond-based Circuit City did not respond to requests for additional information, Mr. Keyes said.

Although short on details, Blockbuster yesterday announced a vision of the combined company that involves swapping some services with Circuit City. Blockbuster would offer in-store technical support to shoppers in addition to selling electronics and digital devices with preloaded movies and subscriptions. Circuit City, on the other hand, would drive traffic to its stores by renting movies and games.

Circuit City, with 46,000 employees and 1,400 stores worldwide, has cut costs recently by laying off 3,400 employees and made efforts to reinvent itself through smaller stores and Firedog, a technical support service. The company last week posted a fourth-quarter profit of $4.85 million (3 cents a share) compared with a loss of $4.25 million (3 cents) a year ago.

Blockbuster is also restructuring itself in response to competition from online rental companies like Netflix, by cutting costs and swinging a fourth-quarter loss to a first-quarter profit.

The company operates nearly 8,000 stores and employs about 30,000 workers.

The deal came as a surprise to consumers and technology experts who took to the Web to express criticism.

“I thought Blockbuster was struggling. One struggling nationwide chain buying another struggling nationwide chain doesn”t exactly strike me as the best of ideas,” read a posting by ProphetM on the message board of technology site Ars Technica.

“Well, they already have their Netflix alternative product. They have to think of something really new … and I guess this is it,” posted another user named Nevarre.

Don Reisinger, a technology columnist for CNET.com, called the deal “laughable.”

“In this industry, merging two junkers with each other will only create an even bigger junker that will meet its demise even sooner,” Mr. Reisinger wrote yesterday. “The new Blockbuster will become an even bigger loser. If the company”s management can”t even run a rental business where it sat at the top, how can it be expected to make an impact in an industry where it”s subdued at the bottom?”

The offer was likewise met with a cold reception by Circuit City officials, who yesterday confirmed the bid but urged investors to hold off on taking any action. The company cited questions over Blockbuster”s ability to fund the deal, saying it was unwilling to provide further information until the would-be suitor addresses funding issues.

Blockbuster said its shareholders fully support the deal, which it would pay for with cash raised by a rights offering to existing shareholders.

Circuit City has been under scrutiny from activist shareholder Mark Wattles, whose Wattles Capital Management owns 6.5 percent of the company and wants to dump the company”s board of directors, including Mr. Schoonover.

News of the offer yesterday sent Blockbuster shares down 10 percent to close at $2.81 on the New York Stock Exchange. Shares of Circuit City, however, closed 27 percent higher at $4.97 a share.

TOGETHER THEY STAND?

Blockbuster Inc. made a hostile $1.35 billion bid for Circuit City yesterday, but one analyst called the deal between sinking retailers “laughable.”

CIRCUIT CITY:

Business: No. 2 U.S. electronics discounter

Headquarters: Richmond

Employees: 46,000

Stores: 1,400 (includes stores and outlets in Canada)

Market value: $836.8 million

Share change past year: —79 percent

Share change yesterday: +27.4%

Sales:* $12 billion

Profits:* —$333 million

Grim reality: Two words - Best Buy

BLOCKBUSTER

Business: Movie and game rentals and sales

Headquarters: Dallas

Employees: 30,000

Stores: 7,800 (in 22 countries)

Market value: $554 million

Share change past year: —52%

Share change yesterday: —10.2%

Sales:* $5.5 billion

Profit:* —$85.5 million

Grim reality: Can you spell Netflix?

* Past 12 months

Source: Yahoo Finance, The Washington Times

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