A deal not even a mother could love

Blockbuster CEO James Keyes used almost epochal language this month to describe his company's unsolicited takeover bid of Circuit City Stores Inc.

A Blockbuster/Circuit City combination would result in a "game-changing retail concept" that would be "uniquely positioned for the convergence of media content and electronic devices."

But the audacious $1 billion-plus bid for the nation's second-largest consumer electronics retailer has generated about as much excitement as last year's release of "Evan Almighty."

Perhaps the only winner of a deal between the two struggling retailers is Best Buy Co. Inc.

Analysts said the Richfield-based retailer stands to benefit as its archrival Circuit City, which was in the midst of a turnaround, is stuck trying to figure out how to integrate its operations with a movie rental business that has struggled to remain profitable. Dallas-based Blockbuster has 8,000 video rental stores worldwide at a time when more and more people are downloading movies or getting them through mail services such as Netflix.

"This is like being asked to the prom by the ugliest person in the school," said Charlie Moro, president of CFS Consulting Group, a retail consulting firm in White Plains, N.Y.

Turnaround threat

Indeed, not since the 2005 combination between Kmart and Sears has a retail merger been so widely panned by Wall Street analysts. Shares of Blockbuster have declined 9 percent since the deal was announced April 14.

There is a good chance that the deal won't happen. Circuit City Chief Executive Philip Schoonover has refused to open the books for negotiations, saying he doesn't believe that Blockbuster can finance the deal. And Keyes told the Wall Street Journal recently that he wasn't willing to engage in a hostile bid and would only proceed if the conditions were right.

Investors don't appear convinced either. Shares of Circuit City are hovering at about $4.60 a share, well below Blockbuster's offer of $6 to $8 a share in cash. Normally, a company's stock trades at or near the price being offered by an acquirer.

Pali Research analyst Stacey Widlitz said it's unlikely that Circuit City's board would consider selling the company at $6 a share, when the company's stock was trading at $20 a share a year ago. "I give it less than a 10 percent chance of happening," she said.

But however unlikely a deal may be, Best Buy executives are likely rooting for it.

(A Best Buy spokeswoman said the retailer normally doesn't discuss the actions of competitors.)

Indeed, any transaction would distract rival Circuit City at a time when the chain had begun to show real progress with its turnaround plan, said David Schick, a retail analyst at Stifel Nicolaus.

Richmond, Va.-based Circuit City this month posted its first quarterly profit in six quarters, largely on cost cuts. The company plans to roll out smaller stores in June with kiosks that enable "real-time chats" between customers and the retailer's Firedog computer support service. Salespeople will carry "tablet PCs" to recommend products based on a customer's desires.

Questions over synergy

A Blockbuster spokeswoman defended the deal, saying that the combined company would gain by selling more devices that play movies and games, along with the games and movies themselves.

Yet analysts did not find the rationale convincing. Some drew parallels to the Sears-Kmart deal, in which much-touted revenue synergies never materialized.

Even if Blockbuster's bid fails, there's still a strong possibility that Circuit City will be acquired by someone else, analysts said.

And activist investor Mark Wattles, who owns 6.5 percent of Circuit City's shares, is waging a proxy fight with the company, demanding the removal of its CEO and board.

"There's a real possibility that Circuit City might get acquired by a retailer with a strong management team and a track record of success," Moro said. "Then Best Buy will have reason to worry."

Chris Serres • 612-673-4308