Night Of The Living Dead: Blockbuster (BBI) Bids For Circuit City (CC)

It is the kind of deal that investment bankers trying to save their jobs and desperate CEOs might dream up. Blockbuster (NYSE:BBI) has proposed to buy Circuit City (NYSE:CC) for $6 to $8 based on due diligence.

According to The Wall Street Journal "Blockbuster said the combination of the two companies would result in an $18 billion global retail enterprise uniquely positioned to capitalize on the growing convergence of media content and electronic devices." The weakness in the argument is that neither company is growing at all.

Over the last three years, Blockbuster’s revenue has been flat to down. Competition from online DVD sales companies lead by NetFlix (NFLX) has robbed the large retailers of customers. VOD over the internet and though cable are further eroding the company’s business. Its shares are at just over $3, down from a 52-week high of $6.67.

Circuit City is in even worse shape. It is being sucked dry by competition from much larger electronics outlets, especially Wal-Mart (WMT) and Best Buy (BBY). As the retail market turns down due to a slowing economy, its prospects are likely to get much worse. Its stock trades at $3.90, down from a 52-week high of $19.12.

There is no evidence that the combination of the companies saves a dime in expenses. How it enhances revenue is the stuff of fantasy. Blockbuster is suggesting that the combined firm take on debt to help finance the transaction. In the present environment where debt is anathema the proposal is especially insane

It is a mad transaction which has no future at all.

Douglas A. McIntyre

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