ATLANTA/NEW YORK The proposed corporate tie-up of Blockbuster Inc BBI.N and Circuit City Stores CC.N looks more like a desperate effort to save two struggling retailers than a bold turnaround initiative.
"It's not quite clear to me what (Blockbuster's) intentions are, how they would finance it, what's the strategic rationale for the deal," said Dennis Bryan, a partner and portfolio manager with First Pacific Advisors, a Circuit City shareholder.
On Monday, Blockbuster disclosed it had offered $6 to $8 a share, or up to $1.3 billion, to buy Circuit City, promising the deal would change the game in electronics and digital media.
Investors were mixed about the valuation of the deal, with some finding it offensively low and others happy that Circuit City attracted any buyout interest at all.
But even after a conference call with Blockbuster Chief Executive Jim Keyes, some strained to figure out exactly what the struggling companies would do differently or better if combined.
"The world is littered with remnants of bankrupt retailers," said Michael Pachter, an analyst with Wedbush Morgan. "It's a bad idea."
Keyes, chief executive of the movie-rental chain, envisions a future where neighborhood Blockbuster stores will sell DVD and digital media players preloaded with movies alongside video games, while Circuit City would bundle movie-download services or subscriptions with each hardware sale.
"It is not inconceivable to imagine a Blockbuster kiosk in your local Circuit City store or a Circuit City video-game terminal residing next to the video-game rental section in your neighborhood Blockbuster store," Keyes told a conference call with analysts.
But many analysts said Blockbuster was reaching for benefits that could be achieved without a potentially disruptive takeover. Blockbuster has considered rental kiosks in other stores for some time, without the distraction of a billion-dollar merger.
"Why does (Blockbuster) need to integrate content and subscription services into the larger box, something that can be easily accomplished through a partnership," Credit Suisse analyst Gary Balter wrote in a research note.
Keyes' presentation left some wondering what real benefits Circuit City would get out of the deal.
"They didn't satisfy my desire for an answer," said Joseph Feldman, an analyst with Telsey Advisory Group.
Keyes argues that combining the companies will yield a more compelling marketing message, and cost savings as well, but Feldman said the proposed deal could wind up hurting both companies, especially Circuit City, which is engaged in the proxy fight with investor Mark Wattles and has its hands full trying to win market share from larger rival Best Buy Co
"I think it just takes (Circuit City) off their day-to-day operations and presents an opportunity for Best Buy to continue to execute," Feldman said.
Investor Wattles, who has nominated five people for Circuit City's board and called for other changes to improve results, told CNBC the Blockbuster option "looks attractive."
And Blockbuster has shown signs of improvement since Keyes joined the company last year. But his track record is not long enough for many.
"Blockbuster has not yet completed its own turnaround," said Wedbush Morgan's Pachter. "Circuit City has serious problems and I'm not sure if Blockbuster management has demonstrated it has the skills to turn those around."
(Editing by Richard Chang)