Circuit City: What Is the Implied Floor For Shareholders?

After Circuit City (CC-NYSE) disappointed the street with earnings (again), this one started to get interesting.  Back on December 19, 2006 we added this one to a "watch list" for the BAIT SHOP, and now Circuit City is getting to the point that its status of only being on a watch list may need to beome an actual candidate.  The company has what we feel is an implied "private equity bid" when it gets too weak.  If you will recall the company received a private equity bid at $17.00 per share in cash from Highfields Capital Management LP back on February 11, 2005.  That was back before private equity firms started buying companies as though they were playing a tycoon boardgame where everything down to the corner deli and the laundromat was deemed as attractive.  Circuit City ultimately rejected the bid as inadequate. 

Management is not impressing Wall Street and any chart-mongering technician would predict that there is not a visible end to the pain.  Enter private equity or a turnaround specialist, or even an activist investor that actually can make a difference.  Now that Circuit City has booted 3,400 higher-paid and more knowledgeable employees, the rift between it and Best Buy is even wider.  It is less noisy and less busy so you get in and out faster, but that is part of the problem.  Circuit City is just not as cool or as fun, and Circuit City is now more vulnerable to an electronics buyer going to Wal-Mart (WMT) or CostCo (COST) than its competitor.  It is no accident that Apple (AAPL) is choosing Best Buy over Circuit City. 

There has to be room for more than 1 or 2 independent retail electronics behemoths in major markets, assuming the #2 player doesn’t self-destruct.  We’ll address this one formally next week after the analysts and portfolio changes are out of the way and after the dust settles.  The economic cycle is much different now than two years ago, and Circuit City needs to fix its recent blunders.  Stay tuned.

Jon C. Ogg
April 4, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.