Circuit City further pressured to open books to Blockbuster

Wattles filed proxy statement Monday

By Jennifer Netherby -- Video Business, 4/29/2008

APRIL 29 | HBK Capital Management, Circuit City’s largest shareholder with a 9% stake, is urging the chain to open its books to Blockbuster for due diligence in the rental retailer’s takeover bid.

HBK also owns a 5% share in Blockbuster.

The move follows a similar request from another major shareholder, Mark Wattles and his Wattles Capital Management last week.

Circuit City has said Blockbuster won’t be able to finance a takeover and has refused to open its books to the chain.

Already facing a potential hostile takeover bid from Blockbuster, Circuit City is now headed for a proxy fight with activist shareholder Wattles.

Wattles, the former head of movie rental chain Hollywood Entertainment and current head of Ultimate Electronics and Wattles Wealth Management, filed a preliminary proxy statement Monday urging Circuit City shareholders to elect four new directors nominated by him, forcing out existing board members up for re-election.

Wattles Wealth Management owns a 6.5% stake in Circuit City and has been a vocal critic of the chain’s operations.

In his filing with the Securities and Exchange Commission Monday, Wattles blamed Circuit City CEO Philip Schoonover and the current board for the retailer’s poor performance. He noted that the company’s stock has dropped 84% since Schoonover took charge two years ago and that the company’s loss grew to $319 million in the last fiscal year, above the $8 million loss the company reported the previous year.

“We question the willingness of the existing board to hold senior management accountable for the company’s poor operating performance and the adverse impact it has had on shareholder value,” the filing said. “Without change to the existing board, we fear that the company’s intrinsic value will continue to erode further.”

Wattles said the company’s turnaround efforts have only hurt the chain and that it needs to focus on its retail execution in terms of product assortment, pricing and merchandising if it is to turn itself around.

He also reiterated frustration over the board’s refusal to seriously consider Blockbuster’s acquisition offer.

“We believe that an acquisition [by Blockbuster] for between $6 and $8 per share is in the best interest of Circuit City shareholders,” the filing said.

Wattles said his board of nominees would “explore all strategic alternatives” and replace Schoonover.

Wattles pointed to the turnaround of Ultimate Electronics after Wattles Capital Management took over as evidence of what his nominees could do for Circuit City.

“Ultimate Electronics stores today have positive same store sales, increasing gross margins and increasing EBITDA,” the filing said. “We believe that our nominees can help accomplish the same turnaround success with Circuit City.”