Novice Investing - Blockbuster Shocking Acquisition

Date: Thursday 07th 2008f August 2008 01:42:02 PM

Blockbuster Shocking Acquisition - 04/15/2008

By: Hari Wibowo

Blockbuster Inc. (BBI) revealed a quite shocking acquisition of its own this week. It revealed that it has been courting the struggling Circuit City Stores Inc. (CC). In a letter dated back in February 2008, Blockbuster offered $ 6 to $ 8 per share of Circuit City common shares with all of the purchase in cash.

Both companies are similar in size, valued at roughly $ 600 Million before the deal was revealed. Blockbuster offered $ 1 Billion for Circuit City common shares and it assured investors that the deal can be done entirely in cash. While, we don't doubt Blockbuster's ability to gather such amount of money, we should first see the rationale of the acquistion here.

Blockbuster reasoned that it can cut cost from the merger. Cost savings will come from combining systems and back-office operations. (<-- standard stuff ), the rationalization of the companies' real estate and better deals with vendors (<--- vague). But anyhow, let's get Blockbuster get the benefit of the doubt that it can achieve all these perfectly and move on to how it can get the financing. As of January 2008, Blockbuster spotted a $ 184.6 Million cash in hand and $ 703 Million in long term debt. This translates into $ 518.4 Million of negative net cash. With $ 1 Billion of Circuit City's acquisition, negative net cash of Blockbuster will swell to $ 1.518 Billion. You want to guess how much is Blockbuster annual interest expense at this point? With 7% interest rate, it comes up to be $ 106 Million. When did Blockbuster report a net profit exceeding $ 106 Million? Back in 2002, which is six years back.

Let's look at Circuit City's financial condition. Circuit City has $ 300 Million in positive net cash, which is $ 818.4 Million better than Blockbuster condition. While Circuit City too reported erratic profit trend for the past five years, it is in a better position to acquire Blockbuster for $ 1 Billion. So, then why on earth should Circuit City engage in any merger discussion? (Apparently, Circuit City felt the same way as Blockbuster had finally revealed its intention back in February 2008 after getting no serious reply from Circuit City's management). As for Blockbuster's offer for $ 6 - $8 per

share for Circuit City, we are sensing that a higher bid is coming up in the near future. No logical reason or insider information here. But generally, when a company with positive net cash almost half of its market capitalization get a merger offer, sooner or later many other contenders start looking at its book and realize what a great value the company has. This is the situation that Circuit City is currently in. As we speak, Circuit City shares is currently trading at $ 4.80 per share or market capitalization of $ 800 Million. Clearly, the market is skeptical that Blockbuster can complete this deal.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Circuit City Stores Inc. (CC) or any other securities.

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