(RTTNews) - Friday, Circuit City Stores, Inc.
(CC) said it reached an agreement with Blockbuster Inc.
(BBI) that allows Blockbuster and its largest shareholder Carl Icahn to conduct due diligence with respect to Blockbuster’ proposed $6 a share takeover offer for Circuit City.
Circuit City also said it received a letter from Carl Icahn stating he's prepared to buy the company if Blockbuster can't get financing on its own or get shareholder approval.
Responding to the allowance of due diligence, Blockbuster said, 'We are pleased to have reached an agreement with Circuit City to conduct due diligence and further explore a possible merger between our two companies. We continue to believe this combination would create significant cost and operating synergies therefore unlocking substantial value for our shareholders.'
Circuit City, a consumer electronics retailer, also announced that it has retained Goldman Sachs & Co. to assist the company in exploring strategic alternatives to enhance shareholder value.
Since the Blockbuster’ acquisition proposal, investors have been pressuring Circuit City to begin discussions with Blockbuster. Last month, Blockbuster, a video rental company, disclosed that it offered to acquire Circuit City for $6 to $8 a share in February. Circuit City responded that while it was open to pursuing further talks, it has been unwilling to allow Blockbuster examine its books on concerns with respect to financing the acquisition.
Circuit City said Friday it has received a response from Blockbuster and a letter from billionaire Carl Icahn, the largest shareholder and a director of Blockbuster. In that letter, Icahn said that he is ready to purchase Circuit City if Blockbuster were unable to receive financing or required shareholder approval to do so after satisfactory due diligence, and assuming that required regulatory approvals are obtained.
As a result, Circuit City stated that this response answers some of its questions with regard to Blockbuster's and it will allow Blockbuster and Icahn to conduct additional due diligence, subject to customary confidentiality arrangements.
Commenting on the recent developments, Philip Schoonover, CEO of Circuit City, said, 'While the Circuit City board has confidence in the company's ability to successfully implement its turnaround plan and generate shareholder value, we believe that we can best serve the interests of our shareholders by exploring all possible alternatives to enhance shareholder value.'
Commenting on allowing due diligence for Blockbuster and Icahn, Schoonover said, 'Let me be clear that our decision to allow Blockbuster and Carl Icahn to conduct due diligence should not be taken as an indication that the board has completed its review of the Blockbuster proposal, that the board has taken a position on the company's value or that it has settled upon a particular strategic course of action.'
In a separate news release, Circuit City announced that it has reached an agreement with shareholder Wattles Capital Management, LLC, or WCM, regarding board representation that will avert a proxy contest.
Under the agreement, Circuit City's board will select three of WCM's director nominees and include them as nominees of the board at Circuit City's 2008 Annual Meeting. In addition, one of the WCM nominees will become a member of the executive committee of the Circuit City board. As a result, at least two of Circuit City's current directors will either step down or decline to stand for reelection at the company's 2009 annual meeting of shareholders.
WCM, which owns about 6.5% of Circuit City's outstanding shares, had been urging Circuit City to provide access to due diligence information and commence good-faith negotiations. Wattles Capital also demanded Circuit City's board to simultaneously seek out other parties potentially interested in acquiring or otherwise entering into a material transaction with Circuit City. Last month, WCM indicated in a regulatory that it would ask shareholders to elect five new directors for Circuit City's 12-member board and oust the others. Concurrent with the recently announced deal with Circuit City, WCM has agreed not to solicit proxies in connection with the 2008 annual meeting.
Last month, HBK investments, which holds a 9.1% stake in Circuit City, has also urged Circuit City to allow Blockbuster to perform due diligence in connection.
HBK said that it believed that over $300 million per year in increased EBITDA could be realized following an acquisition by maximizing cost savings between Circuit City and Blockbuster. In addition, the hedge fund noted that Blockbuster is not a competitor of Circuit City and so, providing such information posed no competitive threat to Circuit City.
The Blockbuster-Circuit City merger talks comes at a time when consumer electronics retailers are finding the going tough amid increasing competition from discount retailers such as Wal-Mart Stores Inc.
(WMT) and Target Corp.
(TGT), and a pullback in consumer spending. Circuit City and its rival Best Buy are experiencing severe pressure on the top-line and margins, as they fight for survival.
The Richmond, Virginia-based Circuit City lost $319.9 million in its last fiscal year, compared to a loss of $8.3 million during the prior year. Net sales for the year declined to $11.74 billion from $12.43 billion a year ago. For the first quarter of fiscal year 2009, Circuit City expects a pre-tax loss from continuing operations in a range of $180 million-$195 million, compared to a loss of $82.5 million in the prior-year quarter.
At the same time, the Dallas, Texas-based Blockbuster also lost $85.1 million or $0.45 per share in fiscal 2007, compared to a profit of $39.2 million or $0.21 per share recorded in fiscal 2006. Total revenues for the full year marginally advanced 0.3% to $5.54 billion from $5.52 billion realized in the prior year. Looking ahead to fiscal 2008, the company expects to report net income in a range of $5 million - $25 million.
As of February 29, Circuit City operated 682 Superstores and 11 other locations in 158 U.S. media markets and has 779 retail stores and dealer outlets in Canada. On the other hand, Blockbuster operates more than 7,800 stores throughout the Americas, Europe, Asia and Australia.
Circuit City shares gained 45 cents or 9.39% and currently at $5.24. During the past 52-weeks, the stock has been trading between $3.44 and $17.97.
Blockbuster shares are down 3 cents or 1.12% and currently trading at $2.65. During the past 52-weeks, the stock has been trading between $2.52 and $5.80.
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