Let's just say I'm a little more sanguine about the prospects of movie-rental chain Blockbuster
While he's not holding his breath to see the deal done, he thinks a merger has merit. Me? I just don't see it. How can two ailing business come together to eventually form a successful growth opportunity? I see no evidence to support a case for cost savings, revenue growth, or profit enhancement, should the two merge. In fact, I find the whole idea pretty loopy.
But Blockbuster's plans haven't quite panned out. Its Total Access program, intended as a synergistic union of its online and bricks-and-mortar business, has been all but abandoned. The company pared back its Game Rush video game store-within-a-store concept to just 400 of its 4,800 locations, and it sold off its Rhino Video chain to GameStop
I'll grant that the company is certainly trying darn hard to hang on here. But offering more than $1 billion for a company that's debatably faring even worse than Blockbuster itself? That seems ridiculous. The movie rental chain can't even get its own act together, so it's doubtful that CEO Jim Keyes will be able to tack another failing enterprise onto Blockbuster's already large pile of problems.
Circuit City management did own up to its mistakes last quarter, but admitting errors and fixing them are two different matters. The company has been steadily losing market share to rival Best Buy
Blockbuster talks of creating "an $18 billion global retail enterprise," but there seems to be no natural link between movie rentals and electronics sales that could make this deal viable. Blockbuster already carries more than $750 million in long-term debt and liabilities. In today's credit climate, turning to debt to finance the acquisition seems like a rather preposterous suggestion, so much of the cash needed for the transaction will most likely come from a new stock offering. But with Blockbuster's price off nearly 60% in the last year, the company is now selling for considerably less than $3 per share.
Furthermore, Blockbuster shares fell 14% today on the buyout news, indicating that investors aren't bullish on the proposed deal. I've got to wonder how much money the company would be able to raise on the equity market.
Keyes was brought on to lead the troubled Blockbuster last year following his famed 7-Eleven turnaround. Maybe he'll prove me wrong, but I just don't see his strategy here. With the economy faltering faster than a Lindsay Lohan movie at the box office, this deal has as much chance of succeeding as that starlet has of winning an Oscar.
Further blockbusting Foolishness:
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Fool contributor Rich Duprey owns shares of GameStop and Wal-Mart, but he does not have a financial position in any of the other stocks mentioned in this article. See all of Rich's holdings. The Motley Fool has a disclosure policy.