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Blockbuster woos Circuit City

In what could become a gathering of losers or the next one-stop-shopping convergence in home entertainment retailing, Blockbuster Inc. on Monday offered to buy Circuit City Stores Inc. for $1.1-billion.

Blockbuster CEO Jim Keyes, who previously headed 7-Eleven Inc., said the chains could offer high-tech entertainment in smaller stores closer to where people live and a way to close hundreds of Blockbuster's 5,000 U.S. stores and Circuit City's 680 stores.

That the deal is even on the table is a sign of just how far the nation's biggest video store chain and the second-biggest consumer electronics chain have fallen. The two companies, which have combined revenues of $18-billion, are valued by Wall Street at a mere $1.3-billion together.

Blockbuster's $6 a share offer, which represented a 54 percent premium, got a chilly response from Circuit City, which questioned whether the Dallas video and game store chain can raise the cash. Keyes said he might sweeten the offer to $8 a share if Circuit City gave him a closer look at the books, something the Richmond, Va. retailer declines to do.

Circuit City shares jumped 27 percent Monday to close at $4.97. That's up $1.07, but still below the Blockbuster offer. Shares in Blockbuster, which is about to report its first quarterly operating profit in five years, dropped 10 percent to close at $2.81, down 32 cents.

Keyes is betting that instead of downloading entertainment content at home, consumers will want a store nearby that sells or rents games, movies and other diversions along with offering service techs, warranties and software to use it. So far, only Apple Inc. has married such combinations.

"This can be the differentiation that dramatically accelerates the transformation of both companies," said Keyes. "If we don't move now, we risk being left in the dust."

By acquiring Movieline, Blockbuster has exclusive rights to distribute digital content of some Hollywood studios while the movie industry figures out how to get paid in a You Tube world.

About 95 percent of all Blockbuster stores are within 5 miles of a Circuit City. Keyes sees the bigger Circuit City stores partitioned into distribution centers that supply kiosks and hardware in satellite Blockbuster stores.

Analysts were stunned by the boldness of the move, which is backed by Carl Icahn, Blockbuster's biggest shareholder.

"It's pretty audacious … almost to the point of recklessness," said Michael Pachter, an analyst with Wedbush Morgan.

For Circuit City, which reported a double-digit same store sale decrease, sales of high definition TV sets proved a curse as prices tumbled. Meanwhile, Blockbuster became part of a proxy battle with another figure from the video store age. Mark Wattles, the founder and one-time chief executive of Hollywood Video, has a 6.5 percent stake in Circuit City. He is leading a proxy battle to oust the current board and chief executive Philip Schoonover and put the company up for sale.

Mark Albright can be reached at albright@sptimes.com or 727-893-8252.

Blockbuster woos Circuit City 04/14/08 [Last modified: Monday, April 14, 2008 11:06pm]

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