Item
2: On April 14, 2008, the Associated Press published the following
news story:
Blockbuster
Offers to Buy Circuit City
Monday
April 14, 4:57 pm ET
By David
Koenig, AP Business Writer
Blockbuster Offers More Than $1B for
Circuit City, Which Questions Ability to Finance Offer
DALLAS
(AP) -- Blockbuster Inc., which has been busy trying to fix its own movie-rental
business, is making a hostile takeover bid of just over $1 billion for Circuit
City Stores Inc. with dreams of creating a huge chain that would sell electronic
gadgets and rent movies and games.
The offer
is larger than Blockbuster's entire stock market value, but Chief Executive
James Keyes said he was confident his company can swing the deal and that the
move has the support of one of his board members, financier Carl Icahn, who
could help with financing.
Icahn,
Blockbuster's largest shareholder, did not return calls for
comment.
Keyes
said combining the companies would create a 9,300-store chain that could sell
portable devices and entertainment for them, much like Apple Inc.'s stores. The
larger Circuit City stores would have movie-rental stores inside, and
Blockbuster locations would offer a limited selection of
electronics.
News of
Blockbuster's bid for Circuit City, valued at up to $1.35 billion, sent the
struggling retailer's shares up 27 percent on Monday. Blockbuster shares
fell.
Circuit
City, the nation's second biggest consumer electronics chain, said it doubted
Blockbuster could finance the deal and has resisted opening its
books.
Analysts
said Blockbuster, which is undergoing its own turnaround effort, could be
getting more than it can handle in Circuit City. The chain has been fighting a
losing battle against rival Best Buy Inc.
"Blockbuster
is not thinking through how difficult the big-ticket consumer-electronics
business is. It's pretty audacious ... to the point of potentially reckless,"
said Michael Pachter, an analyst with Wedbush Morgan Securities.
"Look
what happened to CompUSA and Good Guys and Ultimate Electronics," he said,
ticking off the names of chains that failed. He said Circuit City could continue
losing market share to Best Buy.
BMO
Capital Markets downgraded Blockbuster stock. Analyst Jeffrey Logsdon said he
couldn't understand the strategic value of a hostile bid for Circuit City. He
warned the fight could distract the movie-rental company from its own
recovery.
Blockbuster
has struggled for several years to compete with cheap DVDs from retailers such
as Wal-Mart Stores Inc., video on demand from cable and satellite TV operators,
and the by-mail rental service of Netflix Inc.
Since
joining Blockbuster last summer, Keyes has dumped online customers who were
costing more money than they brought in, and bought Movielink, a digital
movie-downloading service operated by major Hollywood studios.
Keyes
said the moves were working. He said Monday that the company would report
first-quarter net income of $30 million, a dramatic reversal of its loss of $49
million a year ago. Analysts were expecting a profit of about $20
million.
Blockbuster
approached Circuit City in December, and sent a letter in February to Circuit
City CEO Philip Schoonover offering $6 to $8 per share.
Keyes
said he decided to go public Monday with a bid of "at least $6" per share, a 54
percent premium over Circuit City's closing stock price on Friday, after the
retailer repeatedly refused to let Blockbuster see its books.
By
releasing his exchange with Schoonover, Keyes hoped to persuade Circuit City
shareholders to support the bid despite management's reluctance.
Circuit
City said it has exchanged information with Blockbuster but wasn't convinced
that the movie-rental chain could finance its offer. Circuit City advised its
shareholders to take no action until the company board reviews the
bid.
Based on
Circuit City's 168.4 million shares outstanding at the end of last year, the
February offer of $6 to $8 per share valued Circuit City at $1.01 billion to
$1.35 billion.
Richmond,
Va.-based Circuit City, with about 680 stores, lost its status as No. 1 American
consumer electronics chain in the 1990s to Best Buy, which built bigger stores
in better locations and operated more efficiently.
Lately,
Circuit City has been pinning its recovery on smaller concept stores,
cost-cutting and its Firedog tech-service business. The company has laid off
3,400 retail workers and hired lower-paid replacements.
The
chain's management has been under pressure from shareholders to do something
about a slump that has sent the shares tumbling from over $30 in mid-2006 to a
low of $3.44 last month.
The
company swung to a profit of $4.85 million for its fiscal fourth quarter due to
a $7.3 million tax benefit, but activist shareholder Wattles Capital Management
is still seeking better profits and the ouster of Schoonover and the
board.
Mark J.
Wattles, founder of the Hollywood Entertainment video-rental chain, said Keyes
has moved Blockbuster in the right direction "in the face of severe challenges"
and could do the same for Circuit City.
"I have
never believed that the turnaround at Circuit City was going to be terribly
difficult," he said in an interview. "It just needs a better management team to
accomplish it, to get it done faster."
Blockbuster
said in its February letter it is willing to pursue alternative deal structures
which would enable Circuit City shareholders to receive stock. Blockbuster --
worth about $620 million based on Friday's closing stock price -- would expect
to fund the takeover through borrowing and by issuing new stock through a rights
offering to existing shareholders.
Blockbuster
said it requested a response by Feb. 21 but that Circuit City had failed to
provide the financial information that the Dallas-based company needed to make a
definitive takeover proposal.
Blockbuster
is asking for information including Circuit City's long-term corporate strategic
plan and outlook, detailed store-level performance figures, and current
inventory aging schedules.
Circuit
City shares rose $1.07, to $4.97 Monday. Blockbuster shares fell 32 cents, or
10.2 percent, to $2.81.
AP
Business Writer Michael Felberbaum in Richmond contributed to this
report.
Item
3: On April 14, 2008, Marketwatch.com published the following news
story:
Blockbuster's
bid no funding issue, investor says
By Andria Cheng,
MarketWatch
Last
update: 6:07 p.m. EDT April 14, 2008
NEW
YORK (MarketWatch) -- Blockbuster Inc. won't have problems seeking financing to
acquire Circuit City in part because billionaire investor Carl Icahn said he
would help fund the more than $1 billion bid if needed, according to Mark
Wattles, who heads Wattles Capital Management, one of Circuit City's top
shareholders.
Wattles
Capital Management ranked as the third largest Circuit City shareholder as of
February with a 6.5% stake. Wattles said he spoke to Icahn Monday morning after
Blockbuster said it would offer to pay at least $6 a share for Circuit City.
See full
story.
Wattles
Capital Management has launched its own proxy fight against Circuit City by
nominating a slate of five directors and calling for the electronics retailer to
replace its Chief Executive Phil Schoonover.
Circuit
City, in its response to Blockbuster (BBI) Monday, raised
concerns about how the movie-rental chain, which had only about $184.6 million
in cash as of the last quarter, plans to fund the transaction. It also said it
wasn't willing to provide Blockbuster with additional due-diligence information
until its concerns are addressed.
"Carl was
enthusiastic about the transaction and said he was willing to backstop the
finance," Wattles said in an interview. "There's lots of capital to borrow from.
The company is in play. The Circuit City (CC) board needs to
recognize that."
In
addition to assurance from Icahn, Blockbuster's largest shareholder, the
movie-rental chain also has $1.6 billion in inventory it can borrow against,
providing further sources of funding to finance the transaction, Wattles
said.
Wattles,
who said he's "in favor of" a transaction, said Circuit City is worth more than
$6 a share. He met with Circuit City management on Friday and described the
meeting as "productive."
He also
said Circuit City would benefit from getting access to Blockbuster's management
team should a merger occur.
"Blockbuster
has great management team," Wattles said. "What Circuit City doesn't have is a
good management team. That's the biggest synergy."
Circuit
City spokesperson Jackie Forman didn't return a call seeking comment. Icahn
wasn't immediately reachable to comment.
Based on
168.4 million Circuit City shares outstanding, Blockbuster's proposal values the
electronics retailer at more than $1 billion.
Just
about a year ago, Circuit City stock was trading above $19.
Andria
Cheng is a MarketWatch reporter based in New York.
Item 4: On April 15, 2008, the Wall Street Journal published the
following news story:
A
Blockbuster Raid on Circuit City
With
Support of Carl Icahn,
Ailing
Video-Rental Chain
Bids
for Weakened Retailer
By
MERISSA MARR and GARY MCWILLIAMS
April
15, 2008; Page B1
When
retail veteran Jim Keyes became CEO of Blockbuster Inc. nine
months ago, he embarked on a mission to save the video-rental chain from fading
into extinction. Monday he unveiled a bet-the-company takeover bid for another
troubled retailer, Circuit City Stores
Inc.
Mr. Keyes
went public with an unsolicited offer of more than $1 billion in cash, or
between $6 and $8 a share, for the Richmond, Va., company several months after
the two companies began private discussions. Blockbuster said it went public
because Circuit City had refused to provide access to its books to allow
discussions to move forward.
Circuit
City Monday said it would continue to evaluate Blockbuster's bid but urged its
shareholders to take no action. "We have a number of questions that have not
been answered by Blockbuster," a spokesman said.
The move
-- made with the strong backing of Blockbuster's biggest shareholder, activist
investor Carl Icahn, and the support of dissident Circuit City shareholder Mark
J. Wattles -- set off a furious debate on Wall Street. Blockbuster shares fell
10% as investors questioned how the two companies, which have each seen their
stocks plunge sharply in the past year, would be better off
together.
Blockbuster's
move "borders on being reckless," Wedbush Morgan Securities wrote in a research
note, adding that Blockbuster had made good progress in its turnaround in recent
months, while Circuit City "appears to be in the middle of a death
spiral."
Mr. Keyes
argued the $18-billion combination would save money and benefit from offering a
broader range of entertainment and products, everything from DVD players and
flat-screen TVs to video and game rentals.
The sheer
audaciousness of Blockbuster's bid -- its market capitalization of $630 million
is smaller than that of Circuit City -- highlights how few options there are for
the video chain. The video-rental market has been stagnant for years, as
consumers have turned to an ever-growing number of alternatives including
mail-order DVDs from Netflix Inc., video-on-demand from cable services, or
buying DVDs. Under former Chief Executive John Antioco, Blockbuster tried an
array of different diversification strategies, none of which made much
impact.
Shahid
Khan, a consultant at IBB Consulting Group in Princeton, N.J., said Blockbuster
has no choice but to seek a new business. "This [bid] is a clear indication that
the DVD rental business is pretty much dead or in the process of dying.
Blockbuster has to do something radically different to stay in
business."
The bid
also shows the influence of Mr. Icahn, who has been actively involved in
Blockbuster since winning a proxy battle for board representation in 2005. He is
the financing brains behind the deal and has indicated he will arrange the money
himself if needed.
"I am
more of an operator than a deal maker, and Carl has provided good counsel on how
to proceed with the transaction," Mr. Keyes said in an interview
Monday.
Also
playing a role on the other side of the table is Mr. Wattles, himself a onetime
video-rental chain owner who has his own history with Mr. Icahn. Mr. Wattles
founded the Hollywood Entertainment video-rental company, which was the target
of a bid by Blockbuster in 2004. At the time, Mr. Icahn was a major shareholder
in both Hollywood Entertainment and Blockbuster.
Now, Mr.
Wattles has launched a proxy battle for Circuit City, seeking to remove the
company's CEO, Philip J. Schoonover. Yesterday he said he supported
Blockbuster's bid and would press for acceptance of any offer "north of $6 a
share."
The bid
comes just as Blockbuster emerges from a long stretch of financial turmoil. The
company took on a heavy debt load when it was carved off from its former parent
Viacom Inc. in 2004.
As of
Jan. 6, Blockbuster had outstanding debt of $758 million. Buying Circuit City
would likely add significantly to that debt load.
Mr.
Wattles said in an interview Monday that he had spoken to Mr. Icahn by phone and
the billionaire investor confirmed he would backstop the deal if needed. "He
said, 'I'm available to put the capital up in a rights offering,'" said Mr.
Wattles. "Carl Icahn can clearly do this transaction. He wants to do the
transaction and is excited about it," he continued.
Mr. Icahn
couldn't be reached for comment.
His
support enabled Blockbuster to make a cash offer, Mr. Keyes said. However, it's
unclear how the deal will be structured, and there may end up being a stock
component, he said.
Mr.
Keyes, who previously headed the convenience-store chain 7-Eleven, was credited
with helping revive that company before he retired in 2005. He came out of
retirement to join Blockbuster this past July. He focused on slashing costs and
making radical changes in Blockbuster's online strategy. He took steps to
improve the availability of titles in stores and also added more merchandise for
sale.
His
efforts showed signs of paying off in the fourth quarter, when net income more
than tripled. On Monday, Blockbuster projected first-quarter net income of $30
million, compared with a year-earlier net loss of $49 million.
Circuit
City, meanwhile, has been trying to shore up its fading business amid fierce
competition from rivals such as Best Buy Co. and Wal-Mart Stores Inc. It
replaced thousands of staff with lower-paid employees, a move that hurt its
business.
Mr. Keyes
said he first approached Circuit City last year as he was casting around for
potential partners for Blockbuster. He quickly concluded that a partnership
wouldn't be enough to achieve the benefits of a combination, and he brought up
the idea of an acquisition.
He argued
that cost savings alone justify the deal. They include closing some stores where
there is overlap, cutting duplication at each company's head office, delivering
products to stores more effectively and teaming up on advertising. The plan is
to keep a combination of big-box stores and smaller locations.
Mr. Keyes
foresees that within six months of the proposed merger's closing, customers
would likely see movie and game rentals available at Circuit City stores.
Further down the line, he also sees hardware like portable-media players being
sold at Blockbuster locations.
Circuit
City seemed open to the offer at first, he said. But as talks progressed the
electronics retailer started to drag its feet. Mr. Icahn played a key role in
the decision to go public with the bid.
Mr. Keyes
described the deal as "game-changing" and said for Circuit City shareholders,
the offer is "simply too attractive to ignore."
"Our view
of the change that's occurring in consumer electronics and the movie-rental
business is one of convergence," Mr. Keyes said. He sees Apple Inc.'s stores as
an example of "a user-friendly one-stop shop with solutions for the consumers"
that could be a model for Blockbuster-Circuit City combination.
Item
5: On April 17, 2008, Reuters published the following news
story:
Wattles
expects win in Circuit City proxy fight
Thu Apr
17, 2008 7:22pm EDT
ATLANTA,
April 17 (Reuters) - Mark Wattles, whose investment firm is looking to unseat
directors at electronics retailer Circuit City Stores Inc (CC.N: Quote, Profile, Research), said on
Thursday that he expects victory in the proxy fight.
"There's
no doubt that there will be a change in board members," Wattles told Reuters.
"People may question whether all the board members will be
removed."
Wattles
said he felt the likelihood for board changes at Circuit City has risen in wake
of Blockbuster Inc's (BBI.N: Quote, Profile, Research) disclosure
earlier this week that the movie rental company had offered as much as $1.3
billion to acquire the retailer.
Wattles
Capital Management has nominated five people for Circuit City's board. The
annual meeting is set for June.
Wattles
said shareholders faced with the opportunity to receive a significant premium to
the current Circuit City share price would be more likely to vote to replace the
board.
Circuit
City's stock eased 11 cents, or 2.4 percent, to $4.55 on the New York Stock
Exchange on Thursday. On Monday, when Blockbuster disclosed its interest, the
shares closed at $4.97.
Wattles,
the founder of Hollywood Entertainment Corp, has also called for the ouster of
Circuit City Chairman Philip Schoonover. His firm owns about 6.5 percent of
Circuit City's stock.
Blockbuster's
proposal to buy Circuit City drew criticism from analysts who follow both
companies. They questioned the strategic fit of the two companies and how the
acquisition would be financed.
The movie
rental company said that billionaire investor Carl Icahn, a Blockbuster
shareholder, supported its bid and could help finance it.
Circuit
City responded that while it was open to further talks with Blockbuster, it was
unwilling to let the company examine its financial books. It added that
Blockbuster has been unable to satisfy concerns that it could finance the
proposed deal, and a spokesman had no additional comment on
Thursday.
Wattles
reiterated that he had spoken with Icahn, who had said he was willing to support
the Blockbuster bid. Wattles said he didn't know of the $6-to-$8-a-share offer
prior to the public disclosure.
"At a
price point somewhere between $6 and $8, I would be a 'yes' vote," Wattles
said.
(Reporting
by Karen Jacobs, editing by Richard Chang)