Blockbuster Inc. said Tuesday , July 1 it is withdrawing its proposal to buy Circuit City Stores Inc., the big-box electronics retailer whose sales have tumbled this year.
Chief Executive James Keyes said in a written statement that the proposed deal, at a price of more than $1 billion, didn't make sense because of market conditions. Blockbuster shares jumped nearly 12 percent on the news, while Circuit City shares continued their fall.
The retailer's stock has dropped below $3 from its peak near $31 in May 2006, and the shares have lost about half their value since a one-day rally spurred by Blockbuster's bid. Blockbuster shares have fallen 20 percent since the bid was announced in April.
Five years after Circuit City refused an $8-a-share offer from Mexican billionaire Carlos Slim and a 2005 $17-a-share offer by hedge fund Highfields Capital Management LP Schoonover & Crew messed up a $6 to $8 offer from Blockbuster (BBI). Shares today sit at $1.75. Why did Blockbuster back out? Lack of disclosure from Circuit City.
Now comes word that they have put on hold the completion of a $45 million distribution facility near Scranton, Pa., which had been slated to begin operations later this year. The facility was to replace two others in an effort to streamline operation and save money. When you don't have the cash to spend (even after canceling the dividend) to save cash, things are really tight.
The WSJ did a piece yesterday that has a classic paragraph
"In July, Mr. Schoonover asked investors to forget much of the Richmond, Va., company's recent history: turnarounds that didn't materialize, a revolving door of top executives and burgeoning losses. Instead, he held out a vision of a company "on the right track with the right strategies, the right talent and improved processes," he said in a conference call with investors."
Schoonover then went out and destroyed investors last hope of seeing more than $3 each for their shares anytime this decade.
The financial crisis has added to Circuit City’s woes, tightening credit and decreasing consumer spending. Prior to the crisis, Circuit City had been struggling fighting competitors, Best Buy and Wal-Mart, and it hasn’t reported any earnings since fiscal 2006. Circuit City is struggling to stay afloat, and with a strained working capital it is having difficulties financing inventory for the coming holyday season. It decided to close down and liquidate 155 stores, more than a fifth of its U.S. stores, in hopes to reduce operating costs by cutting 17% of its work force. Best Buy and Wal-Mart will benefit from this, as Circuit City’s market share decreases due to less store locations. But this action was necessary and Circuit City was limited with options, either close down stores or seek bankruptcy. Circuit City will continue to struggle amid economic conditions and will continue to close more stores or close down entirely, an option the company has stated it has not ruled out.
Circuit City's consumer satisfaction ratings continue to decline, despite the launch of firedog and an increased emphasis on customer service. The recent company-wide layoff of the most senior in-store personnel suggests that this trend will continue.
So far in fiscal 2008 Circuit City has fallen even farther behind industry leader Best Buy, and faces increasing pressure from Wal-Mart and other discount retailers in an extremely competitive market.
Circuit City has said nothing specific about upcoming numbers but did do something noteworthy. After Best Buy, Wal-Mart and NetFlix announced they will go exclusively with the "Blue-ray" HD DVD format, Circuit City, apparently the last one in the loop, was forced to price cut a stand-alone HD player that plays both Sony Corp.'s Blu-ray disc and Toshiba Corp.'s HD DVD format titles by $100.
This stock appears particularly vulnerable to substantial decline among retail technology chains, likely in the face of disappointing sales reports following the holiday season
As of this writing, the author and related accounts have a short position in CC
Jefferies & Co. noted movie-rental company Blockbuster (BBI) may lower
its $6-per-share takeover bid after Circuit City posted a wider first quarter loss last Thursday on plummeting sales, and
suspended its dividend to save cash. The retailer also said it would cut back on capital spending and forecast a wider loss for the
current quarter. “What we thought after looking at the results was that there was the very high possibility that Blockbuster
would not be able to offer the same price as it had before,” Sterne, Agee & Leach agreed. “The cash burn rate had been much
higher than we had expected. That’s something that anybody acquiring or taking a look at Circuit City would have to take into
consideration.” Note that Circuit City said its cash position fell to $92.2 million as of May 31 from $364.1 million a year earlier.
Most think a more likely outcome is that Blockbuster lowers its bid to $4-5 a share for Circuit City.
Circuit City's 2004-2007 turnaround has been negated so far in fiscal 2008 as the company has failed to turn a profit in the first two fiscal quarters of 2008 due to falling sales of warranties and services and decreasing margins on PCs and HDTVs.
