bloggingbuyouts

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.

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.

With the pending departure of Blockbuster Inc. (NYSE:BBI) Chief Executive John Antioco, the question isn't if the video rental chain gets bought out but when and at what price.

Private equity firms would love Blockbuster. Cash flow from operations was $329.4 million last year compared with a $70.5 million deficit in 2005 thanks to the surging popularity of its Blockbuster Total Access, which allows customers to return DVDs via mail like Netflix Inc. (NASDAQ:NFLX) or at a store.

Video rental isn't dead yet. Buying DVDs of all of the movies you want to watch doesn't make sense and you can't always find the movies you want from video-on-demand services from cable companies. Carl Icahn told me a few years ago that he was a devoted Blockbuster customer when I interviewed him for Bloomberg News in the middle of his proxy fight for the company. Obviously, he isn't alone.

During the fight, Icahn justifiably argued that Antioco was overpaid. A few weeks ago, the company said its board and Antioco were having a dispute over his 2006 bonus. You didn't have to much of a psychic to see that his time at Blockbuster was coming to an end.

Still, Antioco is getting a sweet deal even though it was less than he would have gotten under the terms of his existing contract. He's walking away with a $24.7 million package, plus 5 million stock options that vest by Dec. 31 and can be exercised for the following 30 months, according to Reuters.

Blockbuster shares have more than doubled over the past year, which isn't bad for a company that many people including yours truly had given up for dead. Antioco deserves credit for keeping the faith though Blockbuster's future is still uncertain.

Still, it's amazing he stayed on the job as long as he did.

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