Blockbuster Laments Circuit City's Coyness

"Now let us sport us while we may;
And now, like amorous birds of prey,
Rather at once our time devour,
Than languish in his slow-chapped power.
Let us roll all our strength, and all
Our sweetness, up into one ball ..."

-- From "To His Coy Mistress," by Andrew Marvell

When Blockbuster (NYSE: BBI) CEO Jim Keyes told me last Thanksgiving that he's looking at a "merchandise-driven store plan," he wasn't kidding. Only a few days later, he started talking to his counterparts at Circuit City (NYSE: CC), with the idea of combining the video-rental and electronics chains. A ball rolled up like that would create "an $18 billion retail enterprise uniquely positioned for the convergence of media content and electronic devices," according to the press release.

The story so far
In mid-February, Keyes asked for a few extra financial details, such as store-level cash flow and sales, as well as key points from Circuit City's supplier contracts. Without that information, it would be hard to put together a fair offer, though Blockbuster's management did have a price range from $6 to $8 per share in mind. The lower end of the range would have represented a 26% premium over Circuit City's share price at the time and a whopping 54% over Friday's closing price. But the requested information never turned up, so Blockbuster is going public with its merger interest.

Blockbuster is trying to work itself out of the financial mess it created by going into the by-mail rental space that Netflix (Nasdaq: NFLX) dominates way too quickly. And Circuit City sure could use a white knight with fresh business ideas. Best Buy (NYSE: BBY) and the big-box general retailers are running away with Circuit City's lunch money on a daily basis, as the company's everlasting turnaround efforts never seem to do any good.

Why?
The retailer already sells movies and video games. Renting them out as well wouldn't be too much of a stretch, and it would create a sort of "superstore" format for Blockbuster. Think "general retail plus grocery store equals Super Target (NYSE: TGT) or Wal-Mart (NYSE: WMT) Supercenter," only for a different set of partners. The regular video stores would get access to Circuit City's prowess in electronics distribution, and that kind of firepower could pose a threat to Radio Shack (NYSE: RSH) stores in strip malls across the country.

Blockbuster stores already look different from the blue and yellow little boxes of dead retail space that Keyes took over last year. The old stores were half video rental and half game rental, with a heavy dose of Total Access marketing. Now, it's part movies and part games, but less rental and more retail, with nary a mention of the online program anymore. Selling (or renting) entertainment content alongside the devices you need for playing it just makes sense. That's why the Circuit City offer is an intriguing idea, and I think it could work well.

How?
As much business sense as the proposed combination makes, the financial consideration is another animal entirely. At $6 a share, Circuit City would cost about $1 billion. It would run more than $1.3 billion at $8 per stub. At last count, Blockbuster had only $185 million in cash equivalents and $667 million in long-term debt. Management hopes to fuel the all-cash proposal with new stock offerings, but really, how far do you have to dilute Blockbuster's $538 million market cap and $1.4 billion enterprise value to scare up another cool billion?

Good luck!
Nice idea, Jim, and I sure hope you can pull it off. I'm just not holding my breath while I wait for it to happen.

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