Blockbuster bids a billion for Circuit City

The gaming industry has seen more than its fair share of consolidation in recent months, with a spate of publishing-giant mergers, studio acquisitions, and developer closures. Now, two of the businesses that distribute the industry's wares are getting into the fortification game. Rental kingpin Blockbuster said today it has offered to acquire Circuit City for $6 to $8 per share, or $1 billion to $1.3 billion.

Not unlike EA's proposed buyout bid of rival Take-Two, Blockbuster announced its intent by making public a letter sent to Circuit City chairman and CEO in February. According to today's statement, Circuit City had not responded to the offer in a timely manner, and as such, "Blockbuster is making its proposal public because it believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company."

For Blockbuster's part, the merger of the two businesses would yield what Blockbuster chairman and CEO Jim Keyes calls in his letter "an $18 billion retail enterprise uniquely positioned for the convergence of media content and electronic devices." Assuming Blockbuster and Circuit City proceed with the acquisition, the Dallas, Texas-based rental provider plans to primarily finance the all-cash offer by offering current shareholders the chance to buy additional stock.

As expected from Circuit City's delayed response, the Richmond, Virginia-based retail giant has thus far exhibited caution surrounding the offer. "Consistent with its fiduciary duties, the Circuit City Board of Directors, in consultation with its outside legal and financial advisors, will continue to carefully consider and evaluate Blockbuster's unsolicited proposal," the company said in a statement. "Circuit City advises shareholders to take no action at this time with respect to the unsolicited proposal from Blockbuster."

At primary issue for Circuit City is Blockbuster's ability to raise the necessary funds through its rights offering. "To date Blockbuster has been unable to satisfy Circuit City and its advisors that Blockbuster's proposal could be financed," read Circuit City's statement." In particular, Blockbuster's proposal appears to contemplate a rights offering of unprecedented size relative to the issuing company's market capitalization and at a price that is at a significant premium to Blockbuster's current market price. Circuit City's advisors have noted that most rights offerings, of which there have been very few in the United States, occur at discounts to market."

Prolific Wedbush Morgan Securities analyst Michael Pachter was quick to raise skepticism over Blockbuster's proposed buyout offer. "We think that Blockbuster's move is premature, and borders on being reckless," said Pachter, noting that Circuit City "appears to be in the middle of a death spiral" due to "a worsening economic environment, a well-run competitor [Best Buy], and a constantly changing product offering."

Pachter also questioned the timing of Blockbuster's bid, saying that the rental chain has charted a solid course for turning its own business around. "We question why Blockbuster management chose to make an offer today, rather than six months or more from now, when its turnaround would be closer to completion," pondered Pachter.

As of market close on Monday, Circuit City is trading up 27.44 percent on the New York Stock Exchange to $4.97. Despite Pacther maintaining his "Strong Buy" recommendation, investors have jettisoned Blockbuster shares in the wake of the offer, with the stock trading down 10.22 percent to $2.81.