Circuit City continues concerns over Blockbuster bid

UPDATE: Responds to Wattles letter urging for cooperation to a merger

By Jennifer Netherby -- Video Business, 4/23/2008

APRIL 23 | Circuit City reiterated concerns Wednesday over whether Blockbuster will be able to finance a $1 billion bid to buy the nation’s second-biggest electronics retailer in the current financial environment.

The announcement was in response to an open letter sent to the Circuit City board by an activist shareholder pressing the chain to open its books for due diligence and begin good faith negotiations with Blockbuster.

In the letter, Circuit City shareholder Mark Wattles, head of Wattles Capital Management, urged Circuit City’s board to seriously consider Blockbuster’s offer and “simultaneously seek out other parties potentially interested in acquiring or otherwise entering into a material transaction with Circuit City.”

Wattles says in his letter that Blockbuster shareholder Carl Icahn supports the bid, announced last week, and appears willing to help finance it. He adds that the rental retailer could partly finance the buyout from Circuit City’s own balance sheet.

In response, Circuit City said its financial advisor, Goldman, Sachs & Co., believes Blockbuster can’t close the transaction and said it hasn’t received answers from Blockbuster on how it plans to finance the buyout.

“Circuit City awaits a viable financing structure that is predictably executable by Blockbuster given its current constraints of size and capital structure before it would be appropriate to allow further due diligence,” the chain said in the statement.

Financial analysts also have questioned Blockbuster’s ability to finance the acquisition.

Blockbuster spokeswoman Karen Raskopf said the company announced it had the resources necessary to do an all cash transaction to buy Circuit City when it first made public its offer and "nothing has changed."

"We continue to believe this transaction would drive significant revenue and market enhancements as well as cost synergies, and we believe that it would create an entirely new and unmatched consumer proposition," she said. 

The retailer made public its offer to buy Circuit City last week, after the struggling electronics chain rebuffed Blockbuster's request for due diligence to move forward with the bid. Blockbuster is offering at least $6 a share for the company, envisioning a combined retail chain that would sell both electronics devices and the entertainment content they play.

Wattles, the former Hollywood Video head, currently heads electronic retailer Ultimate Electronics and Wattles Capital Management, which owns 6.5% of Circuit City stock. In the letter, he says that a majority of Circuit City shareholders would be in favor of the bid and warns that if Blockbuster abandons its bid because of a lack of cooperation, shareholders would be “immediately and substantially damaged.”