Blockbuster Trying to Buy Circuit City

Blockbuster issued a press release ("Blockbuster Proposes Combination With Circuit City") to explain to Circuity City shareholders that they are not getting the required information from Circuity City to make a "definitive offer." Blockbuster expects to offer a minimum of $6 per share in cash for the electronics retailer, subject to due diligence. From the Blockbuster press release:

Blockbuster noted the combination of the two companies would result in an $18 billion global retail enterprise uniquely positioned to capitalize on the growing convergence of media content and electronic devices. The transaction would allow both companies to benefit from the revenue growth generated by their complementary products, while the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value.

Blockbuster Chairman and Chief Executive Officer Jim Keyes said, "Our proposal offers Circuit City a significant premium to its existing stock price and creates a game-changing retail concept with a sustainable competitive advantage. We believe the combination will result in a compelling consumer proposition that will drive significant revenue and margin enhancements as well as cost synergies."

Mr. Keyes continued, "At Blockbuster, we have successfully deployed a series of strategic initiatives designed to provide our customers with convenient access to media content. These strategic initiatives have already improved our financial results. Driven by strong performance in our domestic same-store revenues, we expect first quarter 2008 adjusted EBITDA to be approximately $110 million versus $23 million for the same period last year. Additionally, net income for the first quarter of this year should be $30 million compared to a net loss of $49 million for the first quarter of 2007. These results are a clear demonstration that our strategy is working. We look forward to engaging in further conversations with Circuit City and reaching an agreement as soon as possible."

Click through to read the full offer letter.

February 17, 2008

Mr. Philip J. Schoonover
Chairman, President, and Chief Executive Officer
Circuit City Stores, Inc.
9950 Mayland Drive
Richmond, VA 23233
Dear Phil:

Since early December, we have had a number of conversations regarding the potential combination of our businesses. As a follow-up to those discussions, I would like to formally reiterate our interest in pursuing an acquisition of Circuit City. The purpose of this letter is to ensure that there is no ambiguity and to outline our proposal.

Our vision for the "new" Blockbuster is to be the most convenient source for media entertainment. We have undertaken a series of strategic initiatives including enhancement of our core rental business; a transition from solely rental to a concentration on consumer retail; and development of the fast-growing digital download market. We are pleased that these strategic initiatives have begun to improve our financial results and anticipate further improvement going forward.

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. Overall, I strongly believe that a combination of Blockbuster and Circuit City would deliver significant value to our respective shareholders, enhance the overall customer experience, and energize our employees.

Based on our review of publicly available information, we are confident that we can provide a substantial premium to your shareholders with an all cash offer in the range of $6.00 to $8.00 per share, subject to due diligence. We are also willing to pursue alternative structures which would enable Circuit City shareholders to receive stock and participate in what we believe would be an exciting future for the combined enterprise. Given current debt market conditions, we believe most of the cash necessary would

be generated through the issuance of additional Blockbuster equity, most probably in a rights offering to our existing shareholders. We believe they, and the market, will recognize the merits of this transaction and we are confident that we can raise the required equity. The borrowing capacity of the combined business would provide the remaining cash proceeds.

Time is of the essence and we are focused on minimizing the risk of business disruption. We are prepared to commence a very short due diligence process immediately, on the basis of exclusivity, with the intention of entering into a definitive agreement shortly thereafter. Attached, as an appendix to this letter, you will find a concise list of the most critical due diligence items which we would need to review in order to confirm our final offer. We have reviewed this potential transaction with our board of directors, and it is with their full support that we make this request to move forward. Given the importance of this opportunity to Blockbuster and the strong desire to complete it as soon as possible, we would be grateful for your response no later than 5:00 PM CST on February 21, 2008.

Again, I thank you for the time you have spent discussing this opportunity with me. I am prepared to discuss the details of this proposal at your earliest convenience and believe that we will be able to quickly come to a mutually beneficial agreement. I look forward to working together on this exciting opportunity.

Very truly yours,

Jim Keyes
Chairman and Chief Executive Officer
Blockbuster Inc.
APPENDIX

Critical Due Diligence Items

Long-term corporate strategic plan and outlook (including 2008 in detail)
Detailed store-level performance / economics
Sales
Store level G&A
EBITDA (4-Wall)
Cash Flow
Detailed review of real estate footprint
Lease abstracts
Locations relative to Best Buy stores
Corporate headcount with breakdown by division / department
Detailed G&A expense structure
Detailed organizational structure
Monthly working capital schedules for past three years and projected months of 2008
Current inventory and accounts receivable aging schedules
Key terms of material supplier / vendor contracts
IT system overview and structure
Briefs outlining any outstanding / pending litigation claims or regulatory matters

Comments

[Michael]

Circuit City has responded:

http://investor.circuitcity.com/releasedetail.cfm?ReleaseID=304396

[Brit]

I love Blockbuster, but I'm not seeing the conection between these two. Its like if Best Buy bought Netflix.

[Corey3rd]

CEO Keyes is all about Apple Store envy. This goof thinks that somehow buying a struggling electronics chain is going to make him Steve Jobs Jr. But Apple owns its product line. Deep down this deal will destroy Blockbuster, but it won't matter since CEO Keyes will pull an Executive Escape Artist trick and bail before the serious red ink flood the books. he'll be able to blame Icahn and others for not following his exact orders. Anyone working at Blockbuster need to fear for their 401K with Keyes at the helm.

[leonardodicrapio]

I actually think this is a little bit crazy but could be a good deal for the shareholders of both Blockbuster and Circuit City. Circuit City shareholders would stand to gain over 50% (and perhaps more than 100%)from the stock's closing price of under $4 on Friday (April 11th) before the details of the hostile take-over were announced. Blockbuster shareholders could see much better results with the combined operations of both companies.

Jim Keyes successfully turned around 7-11. Don't underestimate him.

[Tom]

This makes absolutely no sense. In my town both Circuit City and Blockbuster (and Hollywood Video too) are virtually empty most of time.

Do two sinking ships sink faster together or seperately?

[Corey3rd]

Keyes trashed me so I have a right to underestimate this guy who doesn't know how to treat a customer properly.

far as turning around 7-11, I wouldn't know since there aren't any of those stores in my area. I didn't even know that 7-11 is now a Japanese owned company.

[Investor]

Re: Circuit City being empty. That's exactly the point, isn't it? Keyes is a turnaround artist, so any acquisition he does must by definition be a failing company to start out with.

Note that this is very beneficial to Netflix, whether or not Keyes succeeds. Either way, he's effectively ceding the DVD-by-mail market to Netflix. If this deal goes through, it definitely shifts Blockbuster's whole center of gravity.

[Corey3rd]

how is Keyes a turnaround artist? He was with 7-11 for 20 years. He was there for the ups and downs of that company. He left when the Japanese wing bought them out. Are the Japanese going to buy out Blockbuster?

If anything he's a company man. he didn't turn around 7-11 by buying Red Lobster and Target. RIght now he's letting Icahn call the shots at Blockbuster by not refining the company.

[leonardodicrapio]

I wouldn't mind getting a 300+% return on my money in five years. To me, that indicates a turn-around.

"Blockbuster's Keyes brings big returns
By Paul Bond

July 10, 2007
When James Keyes was appointed CEO of 7-Eleven in 2000, investors could pick up a share of stock for less than $9. Five years later, a Japanese firm bought the convenience store chain for $37.50 a share."

from the Hollywood Reporter

http://64.233.169.104/search?q=cache:i0yrYxdNgCcJ:www.hollywoodreporter.com/hr/content_display/news/e3if727c623f03c782b9ca79d98fc77b479+james+keyes+7-11&hl=en&ct=clnk&cd=2&gl=us

[Brian]

Look at it this way:

-- Blockbuster beats Netflix on its STB release.
-- Blockbuster-Circuit City or whatever the name will be uses its stores to pitch the STB (much like Apple does with the iPod and Apple TV).
-- Blockbuster's STB is capable of all you can watch for anywhere from $16.99-$34.99/month (the highest end prices of its rent-by-mail).
-- Blockbuster also offers a handheld device, similar to the iPod, capable of all you can watch movies.
-- BOTH devices are exclusive to BBI-CC stores.
-- The STB is Hi-Def.
-- BBI-CC works out a sweet deal with a HDTV maker ...

and so on.

The fact that BBI has been relatively quiet regarding VOD as compared to Netflix and Apple has me wondering if this might not be part of their bigger picture.

[Im Not A Turnip]

I say it's a good match because I think these two companies are the worst in their groups.

Of all the local movie rental stores Blockbuster has the worst movie selection and (by far) the highest prices. They used to be so much better, but when you are selling DVD, renting DVDs, selling Games and renting Games the available variety is so diluted that they do NOTHING well.

Circuit City - Sorry, but I think they are *at best* sleazy. Every time I've ever been in the check-out line I've been "surprised" by mail in rebates. I've even gone back and looked at the advertisements on the tags in the aisles where I've picked up their products to verify that nothing about mail-ins were mentioned.

Hopefully both can survive, but I say GOOD RIDDANCE to both of their current business models.

[Corey3rd]

I'm not denying that 7-11 didn't get make people a nice chunk a change - especially when the Japanese paid top dollar to turn it private. But the fact is that Keyes was with the company for 15 years prior to being CEO. He didn't come over from turning around another company. He came up the corporate ranks. Was he really a genius that single handedly swung the big stick and made the homer? Or was he part of a longterm team of suits at 7-11 that road the stock surge. By his ability to be Ichan's waterboy, I have very little faith that he's really going to make Blockbuster a major force. He's an old man whose VCR probably still blinks 12:00.

Far as Circuit City being able to move a new video platform - does anyone here remember DIVX? The pay-per-view DVD format? They really launched that format.

Apple has a reputation in the business. They have loyal users. What does Circuit City and Blockbuster have? Customers who tell stories of idiot clerks and being ripped off on Monster Cables. Plus Circuit CIty just got fined for not making sure their TV salesmen can explain the switch to digital.

[me myself and i]

i'm sorry, but blockbuster just jumped the shark.

[noe638]

"Do two sinking ships sink faster together or seperately?"

I think if you can take some of the salvage from one ship to repair the other, you are good. Both companies may not survive by themselves.

Hopefully, the next five years will finally be all about integration - ipod, cable / satellite, computer, gaming device, dvd player, set-top box, home security systems, dvr, blackberry or pda, and anything else programmable.

BB is talking a big-game with their projected offerings, but I can't believe that anyone could transform an existing bb store into a cafe/lounge/gamespace/hardware and content destination, which is where CC can help. It is pretty clear from the moves that BB is making with in-store experiences that they are going to need bigger stores, which is where circuit city comes in. It would be cool to have a circuit city location with video and game rentals, select your tv and gaming unit and give it a trial, listening stations for music, books...a place to hang out and get all of your media needs met. Also a lot of opportunities to get some help setting up your tv, gaming, set-top box, dvd, car stereo installation) and helping you get it to work...and integrating devices where possible. CCBB can partner with the cable cos and satellite providers, and security system installers to do installs and continue with their car installations...but that takes a lot of square footage and money and is going to require shedding a lot of stores. And how does corporate pacify franchises with new CCBB combined stores?

This move would be extremely challenging if you were talking about two companies with exceptional track records for innovation and no baggage.

[NETFLIX MOVIE BURNER]

I just hope when blockbuster goes under it doesnt take circuit city with em lol

[hueristix]

I agree with whoever said 1+1=0

[Brian]

Here in Richmond, VA were Circuit City is based there are some freaked out people over this BB deal. Would mean a loss of around 3,000 jobs, this follows the loss to St Louis of Wachovia Investments jobs.

Personally, I hate CC so anything that helps bring them down is fine with me.

[PJ]

I can't believe only ONE person on this thread mentioned the DIVX format silliness. That was the first thing I thought of when I read of the takeover bid.....