Blockbuster Goes Fishing

Blockbuster (BBI) has made a tentative offer to acquire Circuit City (CC) for six bucks subject to due diligence. Apparently there was an offer letter which was not disclosed by either party that dates back to Feb 17 which is almost two months to the day. Preliminary conversations date back to early Dec 07. Who knew?

Circuit City has been lagging the market over the past year with its stock dropping from a high of approximately $19. So how good does $6 look? Blockbuster has also been disappointing. The deal does not have a superior gene pool to lead investors in a bright and prosperous future. Carl Icahn aside; he will not be a factor in operations. He will only want to restructure and financially engineer.

Circuit City is openly sceptical about Blockbuster’s ability to secure the financing. Blockbuster’s offer would be a lot stronger if they were able to demonstrate that money is no object. Credit markets are jittery at best. This smacks of two wounded soldiers wondering if the other still has some ammo left. Some will tell you Uncle Carl will take care of the money so run along and play nicely.

So here is the fundamental problem. Carl Icahn. He has been a shareholder activist thorn in the side for Blockbuster for quite some time. Of his entire advocacy for change within Blockbuster, investors did not pick up on the strategy to quickly buy someone else and try to emulate the Apple retail strategy. Blockbuster has been struggling with the compelling trend to movie downloads over the internet.

Buying into a chain of physical stores does nothing to deal with this challenge which will define retail movie distribution.