Blockbuster (BBI)

Ever hear the saying "throw some $#%t against the wall and see what sticks"? Thus seems to be Blockbuster's (BBI) current business plan.

The box top game is a race. The first out with an affordable offering wins. This isn't something I envision people swapping in and out of. The set-top they buy initially will be the one they use for quite some time. I am still mystified at the apparent blase' attitude by Blockbuster with this. From mail rentals, to online rental, and now the box set they have consistently been behind the competition. This is the right move to make, they just should have made it maybe in May 2007? ^[1]

After being late to the video by mail model, late to the box top set model, talking about turning their obsolete locations into Apple Stores (AAPL) like locations, and attempting a doomed from the start takeover of Circuit City (CC), Blockbuster is trying something else. Now Blockbuster is in talks about taking a stake in the new premium TV channel to be launched by Viacom with Lions Gate Entertainment (LGF) and Metro-Goldwyn-Mayer.

Ok. Haven't we all come to the conclusion blockbuster doesn't have the financial ability to complete the proposed Circuit city deal? How do they intend on doing this also? Have you ever seen a company run in so many seemingly disconnected directions at once? This smacks of desperation. Blockbuster could survive and even prosper and compete with Netflix (NFLX) if they would only acknowledge what everyone but them seemingly understands, they need to close their stores. Should that happen, the cash save could possibly finance one or some of the shotgun like business moves they are contemplating. They cannot, however, keep them and do the others. I guess the only thing left to do for them is to talk about a merger with Sprint (S)?

1. ↑ ValuePlays Research

In March 2008, Blockbuster announced that for fiscal 2008, it expects to deliver adjusted EBITDA in the range of $290-$310 million, which corresponds to GAAP financial measures of operating income (EBIT) in the range of $113-$133 million and net income in the range of $5-$25 million. Even at the high end of the range that equates to EPS of only $.13 cents a share which means shares currently trade at 25 times the top end of estimates and 108 times the low end. Either way, too expensive.

Blockbuster (BBI) said it made a $1 to $1.3 billion cash offer in a Feb. 17 letter to Circuit City (CC) Chief Executive Philip Schoonover. The proposed Circuit City (CC) and Blockbuster (BBI) merger is the equivalent to the merger of Sears and Kmart that created Sears Holdings (SHLD). While a nice exercise, it lacks one thing, legitimacy.

Here is were is falls apart and it does so before it actually get started really. Sears and Kmart did the same thing, retail. Specifically clothing, lawn and garden, electronics, auto and the rest of the big box general retailer gambit. The combination of the two created the nation's third largest retailer with sales of over $50 billion a year. The combination of BBI and CC will do nothing to increase the size of either in their prospective industries.

Blockbuster rents dvd's and Circuit City sells them it their stores. They also both.....well.....they don't do anything else in common. Other that the fact they both have dvd's in their stores, the two businesses have no similarities at all, other than poor management.

A Circuit City and RadioShack (RSH) merger would be a similar comparison to Sears / Kmart as those businesses are very similar. There would be, in that case, cost savings involved with the merger that could be realized and the two businesses would have selling synergies that could boost results. Also there is the little reality that RadioShack's Julian Day could out-manage CC's Phil Schoonver in a coma.

One also has to remember the Sears / Kmart merger has produced a 10 fold increase in shareholder value, does anyone out there actually think a Circuit City / Blockbuster one will produce even remotely similar results? Anyone? Does anyone actually think they will be even profitable considering the debt load necessary to pull off the deal?

They'll have to essentially dilute shareholders to the max and then raid the credit line CC set up in February to fund the deal since banks are not loaning money for deals that make sense much less one that means a struggling retailer barely making a profit buying one that isn't.

The larger issue is, what is Blockbuster trying to become? They have a valuable franchise in video if they would just realize the video store concept is officially dead. Adding more brick and mortar locations, diluting shareholders and maxing out the credit line to acquire another problem is a huge mistake.

Keyes said "The combination of Blockbuster and Circuit City will result in an $18 billion retail enterprise uniquely positioned for the convergence of media content and electronic devices. We would seek to differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices. Both companies would benefit from complementary products, marketing, management strengths, technology and distribution and the resulting synergies would significantly improve consolidated financial performance."

He has mentioned this vision before but it has yet to be rolled out in Blockbuster locations, why bet the farm on a wholly unproven concept? He talks about "differentiating products" in both locations. That is confusing because I was not aware of any similarities currently. Let's also be real honest here. Using the term "management's strengths" and either Blockbuster or Circuit City in the same sentence is laughable unless it is preceded by "lack of".

Now, were RadioShack to make a run a CC, that would make sense. Borders and Barnes & Noble does. This doesn't on any level.

Maybe Keyes is officially throwing on the towel in the war with Netflix (NFLX) and has decided to try a new direction?^[1]

1. ↑ ValuePlays Research