Promising a "game-changing retail concept," Blockbuster Inc. told Circuit City Stores Inc. shareholders Monday that it would pay just under a 50% premium for their shares in a $1.35-billion bid for the consumer electronics chain.
Circuit City stock shot up on the news and Blockbuster's fell to a 52-week low before recovering slightly.
The video-rental chain said the acquisition would create an $18-billion enterprise with thousands of stores that would rent videos and games and sell portable electronics in the same space.
Blockbuster Chief Executive James W. Keyes said the offer was "simply too attractive to ignore" and that combining the two companies would create a new kind of retail environment "with a sustainable competitive advantage."
The offer of $6 to $8 a share is nearly double Circuit City's closing price Monday of $4.97, which was up 27% from $3.90 on Friday.
For its part, Circuit City said it was unconvinced that Blockbuster -- whose market capitalization is $515.9 million compared with Circuit City's $836.8 million, could afford the deal -- even though billionaire investor Carl Icahn, a Blockbuster board member, might help finance it. Blockbuster's most recent filing with federal regulators said the company had $184.6 million in cash as of Jan. 6.
Circuit City's board advised shareholders to hold off on making any decision until the board reviewed the proposal, which was originally sent to Circuit City CEO Philip Schoonover in a Feb. 17 letter. Circuit City refused to give Blockbuster access to its financial records, one reason Blockbuster cited for making its offer public.
By combining marketing and sales systems and back-office operations, reconfiguring real estate holdings and working out better deals with vendors, the acquisition would help both companies save money, Keyes said.
Circuit City has been struggling. Stuck in the No. 2 spot behind Best Buy Co., the Richmond, Va.-based chain swung to a quarterly profit -- its first in more than a year -- in its fiscal fourth quarter, which ended Feb. 29. The company had cut costs, slashed its tech-service program and replaced with lower-paid workers 3,400 retail employees it had laid off.
Blockbuster seems to be on an upswing. The Dallas-based company's fiscal fourth quarter profit more than quadrupled and it expects to post $30 million in net income for the first quarter, compared with a net loss of $49 million in the same quarter last year.
