Blockbuster withdraws plan to buy Circuit City

/ Source: The Associated Press

Circuit City Stores Inc. plummeted to historic lows in trading Wednesday after Blockbuster Inc. withdrew its takeover bid, causing investors to question the consumer electronics retailer’s future.

Shares of the Richmond, Va.-based company fell 23 cents, or 9 percent, to close at $2.32 in trading on Wednesday, after hitting a more than 17-year-low of $2.10 earlier in the day.

The company, which has seen its shares fall 86 percent from its 52-week high of $15.33, says it will continue to review strategic alternatives, but said that doesn’t require Blockbuster’s presence.

Blockbuster pulled its bid to buy Circuit City on Tuesday night, citing market conditions. The Dallas-based movie-rental chain had proposed a more than $1 billion deal in April with the plans to create a 9,300-store chain to sell electronic gadgets and rent movies and games. Blockbuster shares rose 14 cents, or 5.6 percent, to close at $2.65.

Circuit City has seen only one profitable quarter since the second quarter of 2007 but continues to defend its multiyear turnaround plan despite some missteps and has asked shareholders for the time necessary to leverage the company’s future.

“If you look at our largest competitor (Best Buy Co. Inc.), this is still a healthy business,” Chief Executive Philip J. Schoonover reiterated to reporters after its annual shareholder meeting late last month. “The market is within our control if we get the time.”

Despite the company’s confidence in its turnaround efforts, Circuit City’s board will look for any alternative that would enhance value or possibly speed up the turnaround process, spokesman Bill Cimino said Wednesday.

“Our focus has always been on what’s going to drive the most shareholder value,” Cimino said. The company has given no timetable for action.

But Mark J. Wattles, whose investment firm holds a 6.5 percent stake in Circuit City, said in late June that numerous firms were in the late stages of conducting due diligence and expected announcement of a possible sale within the next month.

Wattles did not return a phone message seeking comment Wednesday.

JPMorgan analyst Chris Horvers told investors in a report Wednesday that he believes there are additional interested parties and “while this does not guarantee a deal (total buyout or other capital investment), due diligence from others is ongoing.”

Horvers said Circuit City’s next announcement should indicate the outcome of the process.

Horvers wrote that Circuit City said vendors continue to provide inventory and have not seen a tightening of terms despite its financial conditions and slowing consumer spending.

“We think the vendors will give CC through the holidays to turn the business before resorting to such a tactic,” Horvers wrote. “Any move by one large vendor could have a snowballing effect on the company.”

Last month, Circuit City said its loss widened in the first quarter because sales at established stores fell more than 11 percent. It reported a loss of $164.8 million in the three months ended May 31 compared with a loss of $54.6 million a year earlier. In its last fiscal year, it lost $320 million on sales of $11.7 billion.

Circuit City, which operates nearly 700 U.S. stores and 775 stores and dealer outlets in Canada, also forecast a wider second-quarter loss than analysts were predicting and suspended its dividend to keep capital available for its turnaround efforts.

Meanwhile, rival Minnesota-based Best Buy reported a 7 percent drop in first-quarter profit last week, saying net income dipped to $179 million from $192 million.

Also Wednesday, Circuit City said in a regulatory filing that lead director Mikael Salovaara resigned on June 26, two days after the company’s annual shareholder meeting. The board selected Allen B. King to replace Salovaara, who served the company for 13 years.

The company said Salovaara had no known disagreements related to Circuit City’s strategic review process, the company or its policies, or the election of four new directors at the annual meeting.