May 9, 2008 / 12:55 PM / 11 years ago

Circuit City to open its books to Blockbuster

ATLANTA (Reuters) - Circuit City Stores Inc on Friday reversed course and said it would open its books to suitor Blockbuster Inc and the movie-rental company’s largest shareholder, billionaire investor Carl Icahn.

A Circuit City store is shown in an undated handout photo. REUTERS/Circuit City/Handout

The electronics chain also said Goldman Sachs Group is assisting it in exploring strategic options, and announced an agreement with investor Mark Wattles that effectively ends a proxy fight ahead of its June annual meeting.

The electronics retailer’s shares climbed more than 8 percent.

Last month, Blockbuster disclosed that in February it had offered to acquire Circuit City for $6 a share to $8 a share, or up to $1.3 billion. Circuit City responded that while it was open to pursuing talks, it was unwilling to let Blockbuster see its books, citing concerns about financing.

On Friday, Circuit City said the movie-rental company had provided additional information that included a letter from Icahn stating that, subject to being satisfied with his due diligence review, the activist investor and affiliates would “stand ready” to purchase Circuit City if Blockbuster were unable to arrange financing.

Blockbuster had indicated in a letter to Circuit City that it planned to withdraw its bid if it had not been granted the opportunity to begin due diligence by April 28, according to a regulatory filing.

Richmond, Virginia-based Circuit City, which became the focus of takeover rumors as its results weakened in the past year, said the decision to open its books “should not be taken as an indication” that it has completed its review of the Blockbuster bid or settled upon a specific course of action.

DEAL OR NO DEAL?

Analysts were mixed on whether the latest news signaled a likely sale of Circuit City. Blockbuster’s bid has drawn criticism from analysts who have questioned the strategic fit of the two companies.

But Wattles, whose firm owns 6.5 percent of Circuit City stock, had called for steps to boost shareholder value. Hedge fund HBK Investments, which owns a 9.1 percent stake in Circuit City and owns Blockbuster shares, sent the electronics chain a letter in late April urging it to allow competitive bidding.

“The fact that Circuit City reversed its position might be an indication that trends have continued to deteriorate, which might have put incremental pressure on the board to avail the company to alternatives,” Lehman Brothers analyst Michael Lasser wrote in a research note.

But he added that Icahn’s willingness to finance the deal, and the threat of possible legal action, could have also prompted the change of heart.

Still, Lasser expressed doubt that Circuit City would be sold, saying poor store locations, cost structure and competitive standing would be difficult to overcome.

Circuit City’s stock has slumped to multiyear lows as it has made store changes that hurt sales, including the replacement of more than 3,000 workers with lower-paid employees. It posted a quarterly profit in April after a string of losses.

“We don’t foresee additional bids surfacing in response to Circuit City’s exploration of strategic alternatives,” Sanford Bernstein analyst Colin McGranahan wrote.

Others said the involvement of Icahn and Wattles enhanced prospects for a deal.

“A merger between Circuit City and Blockbuster still seems like a mismatch to us, and we fail to see synergies beyond distribution cost savings,” Standard & Poor’s Equity retail analyst Michael Souers said in a note.

“While we remain skeptical that Blockbuster will be able to obtain necessary financing on its own, Carl Icahn’s willingness to buy the company if need be increases the possibility that Circuit City will be sold,” Souers added.

Circuit City also said on Friday that it would select three director nominees put forth by Wattles Capital Management and include them as board candidates at its 2008 annual meeting. In addition, one Wattles nominee would become a member of the board’s executive committee.

As part of that agreement, Wattles Capital agreed to drop its proxy fight. The firm had nominated five people to the board and called for the ouster of Circuit City Chief Executive Philip Schoonover.

Circuit City shares were up 42 cents, or 8.8 percent, to $5.21 in afternoon trade on the New York Stock Exchange. The shares have risen 5 percent since Blockbuster made its buyout interest public on April 14, but have fallen 68 percent in the past year.

Blockbuster shares were down 2 cents, or 0.8 percent, to $2.66, also on the NYSE.

Additional reporting by Nicole Maestri in New York; editing by John Wallace and Gerald E. McCormick

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