Ever since Circuit City Stores (NYSE: CC) CEO Philip J. Schoonover sliced 3,400 sales people in March 2007 to save money, I have questioned the savvy of its management. That's because many of those fired sales people took their customers over to Best Buy (NYSE: BBY). As its stock lost 86% of its value, I was surprised that anyone would make a bid for it.
Yet Blockbuster (NYSE: BBI), the struggling video store chain, decided to buy. I don't know what got into Blockbuster's head to make it think that combining two struggling companies would make an agile competitor. The Richmond Times reports that it wanted to create a one-stop shop for movies, games, and electronic equipment. But that dream died when Blockbuster pulled its $1.3 billion offer after reviewing Circuit City's books.
Carl Icahn has said he would buy Circuit City. But it's losing money -- $164.8 million, or $1 a share, in its fiscal first quarter. This was $100 million more than its Q1 2007 loss. And Blockbuster's conclusion after a closer look at its financial statements does not bode well for Circuit City's future. Circuit City stock is down 7.8% in pre-market. Let's see whether any new bidders emerge.
Carl Icahn is known as much for his mistakes as his successes. His process for making money is based on forcing management to do the right thing. He cannot, however, control the forces of the fates and furies, the trends which wreck businesses or old decisions which can come back to haunt the living.
Most notable among Icahn's recent errors are Blockbuster (NYSE:BBI), a movie rental chain which is part of the Stone Age of media, and Motorola (NYSE:MOT), where the handset operation died so quickly that it did not even make it to the door of an emergency room.
Now, Icahn's latest gambit, a play to get Yahoo! (NASDAQ:YHOO) to sell-out to Microsoft (NASDAQ::MSFT) for $33, may have gone off track. Microsoft is no longer interested. So says Steve Ballmer, the Genghis Khan of the software world.
Some companies get it, some don't. Circuit City Stores, Inc. (NYSE: CC) has been in the camp of companies that don't get it. That may have finally changed today.
The company appears to have finally capitulated and realized its days under its own efforts may be limited. There are two separate announcements this morning, but in reality it is all part of the same issue.
This will allow the company to deal with the activist pressure, and may ultimately lead to the company either being run by a better team or become a subsidiary of another company. The company just issued a release that it has reached an agreement with Wattles Capital Management.
As an investor, I wouldn't want to get any closer to Blockbuster's (NYSE: BBI) patently stupid effort to buy Circuit City (NYSE: CC) than I have to.
But HBK Investments-- which owns 9% of Circuit City and 8 percent of the class A stock of Blockbuster and 5 percent of the company's class B stock -- has filed a 13-D on the matter, attaching a letter urging Circuit City to give Blockbuster access to the material it needs to perform due diligence. HBK added that If Blockbuster withdraws its offer because of a lack of cooperation by Circuit City's Board, we believe Circuit City shareholders will be immediately and substantially damaged."
The fund also added that it might be able to provide financing for the deal, and expressed its confidence in the prospects for a combined company: "We believe that over $300 million per year in increased EBITDA could be realized following an acquisition by maximizing cost savings between Circuit City and Blockbuster."
That's a pretty impressive suggestion, and one that flies in the face of what many analysts have said about the proposed deal. But HBK didn't grow to around $14 billion in assets with stupid decisions, so maybe they're onto something.
It is the kind of deal that investment bankers trying to save their jobs and desperate CEOs might dream up. Blockbuster (NYSE:BBI) has proposed to buy Circuit City (NYSE:CC) for $6 to $8 based on due diligence.
According to The Wall Street Journal "Blockbuster said the combination of the two companies would result in an $18 billion global retail enterprise uniquely positioned to capitalize on the growing convergence of media content and electronic devices." The weakness in the argument is that neither company is growing at all.
Over the last three years, Blockbuster's revenue has been flat to down. Competition from online DVD sales companies lead by NetFlix (NASDAQ:NFLX) has robbed the large retailers of customers. VOD over the internet and though cable are further eroding the company's business. Its shares are at just over $3, down from a 52-week high of $6.67.
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Ever since Circuit City Stores (NYSE: CC) CEO Philip J. Schoonover sliced 3,400 sales people in March 2007 to save money, I have questioned the savvy of its management. That's because many of those fired sales people took their customers over to Best Buy (NYSE: BBY). As its stock lost 86% of its value, I was surprised that anyone would make a bid for it.
