Blockbuster-Circuit City deal gets thumbs down

By Karen Jacobs and Franklin Paul - Analysis

ATLANTA/NEW YORK (Reuters) - The proposed corporate tie-up of Blockbuster Inc (BBI.N: Quote, Profile, Research, Stock Buzz) and Circuit City Stores (CC.N: Quote, Profile, Research, Stock Buzz) 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.