bloggingbuyouts

Take it Private! is a series looking at one company each week that, in my opinion, has no reason for being public. To find these companies, I screen for the following:

• high insider ownership
• a history of solid profitability
• a paltry Price/Earnings and/or Price/Cash Flow multiple
• a stagnant stock price accompanied by low volume indicating a lack of interest in the stock.

My purpose in highlighting these companies? This screen can be a good way to find deep value stocks, especially companies that may be attractive to a strategic buyer, private equity firm or management-led buyout at a premium to the current share price. However these profiles should not be interpreted as a recommendation to buy a certain stock. Let's take a look at Rex Stores (NASDAQ: RSC), a stock that I've followed with interest since 2004. Rex Stores owns and operates 111 electronics retail stores in 34 states, a business that has struggled in the face of lower-priced competitors from Best Buy (NASDAQ: BBY) to Wal-Mart (NYSE: WMT)

MicrocapTrader made a compelling and difficult to refute argument about the stock's value in this post from April of 2007: "In any event, assigning a proper valuation to RSC's property brings its tangible book value up to ~ $15 per share without even considering its inventory, worth another $6 per share at its carrying value."

And then there's the ethanol.

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.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Continuing to reach along the retail technology food chain, consumer electronics retailer Best Buy Co. (NYSE: BBY) is assembling its own corporate venture arm to act as a source of "innovative growth options for the enterprise rooted in smaller, more innovative and potentially disruptive opportunities."

Best Buy isn't trumpeting this move. Rather, it is quietly searching for investment expertise through job postings, as noted in a CEPro blog entry Tuesday (and flagged by Paul Kedrosky's Infectious Greed). The company describes Best Buy Capital as having two thrusts:

• A program ("Core Fund") supporting investment opportunities for current business units consistent with our past investment activities; and
• A new strategic initiative ("Alpha Fund"), which provides a market-based mechanism for Best Buy to proactively participate in and encourage consumer innovations and disruptions by making direct investments in companies that are early on in its life cycle.

Continue reading at TechConfidential.com.

Is Circuit City Stores (NYSE: CC) sending signals that it wants to be acquired? The consumer electronics retailer has posted two dismal quarters recently as well as sending mixed signals on how it plans on handling employee headcount. The retailer's admission that it wants to get rid of 3,400 employees (and re-hire some back as significantly lower pay) and losing a few hundred store managers to attrition while adding new stores sounds like a hodge-podge of confusion to me.

Meanwhile, Best Buy (NYSE: BBY) is wiping its feet on the doormats of Circuit City stores nationwide and the retailer must do something. Even though Best Buy and Circuit City sell essentially the same products, the merchandising and retail finesse Best Buy continues to demonstrate is not being echoed by Circuit City, which blames drastic price reductions in flat-panel televisions as a main driver for quarterly losses as of late. Best Buy? Not so much -- it's making a profit.

With Circuit City shares sitting at the $15.88 mark as I write this, is the consumer electronics retailer ripe for a buyout or acquisition? An acquisition does not make sense, but taking the company off the market just might. As you may recall, Circuit City rebuffed an offer in 2005 from a Boston hedge fund at $17 per share -- and now it's below that and probably not going to rise above $20 anytime soon. With a single share of CC being cheaper than a DVD in one of its stores, would a private equity outfit want to make an offer so that shutting down some stores and renovating others in higher-volume areas could be accelerated? Now may be the time.

An Associated Press article says industry analysts suspect the cure for what ails Circuit City Stores, Inc. (NYSE: CC) may be a private equity takeover.

There's no doubt in my mind that Circuit City is one sick puppy. The biggest problem I see is that the recent cost-cutting program has ousted salespeople who bring in the customers. And the comments on my posts provide concrete evidence of this dynamic in action.

But at $15.53, CC is valued below the $17-per-share buyout offer that Circuit City rejected in 2005 from Boston hedge fund Highfields Capital. Although some analysts think CC is worth $22 to $24 a share, its April 30 profit warning -- that its loss would rise from about $50 million to $100 million -- makes that price target harder to hit.