Blockbuster Video - Francorp Client

Francorp's client Blockbuster Video is looking to acquire Circuit City in order to create a new marketing strategy to give customers the full complete home theater experience. This was written in the Wall Street Journal. For more information on franchising your business go to www.francorp.com.

A Blockbuster Raid on Circuit City
With Support of Carl Icahn, Ailing Video-Rental Chain Bids for Weakened Retailer
By MERISSA MARR and GARY MCWILLIAMSApril 15, 2008
http://online.wsj.com/article/SB120815436563212307.html?mod=dist_smartbrief

When retail veteran Jim Keyes became CEO of Blockbuster Inc. nine months ago, he embarked on a mission to save the video-rental chain from fading into extinction. Monday he unveiled a bet-the-company takeover bid for another troubled retailer, Circuit City Stores Inc.
Mr. Keyes went public with an unsolicited offer of more than $1 billion in cash, or between $6 and $8 a share, for the Richmond, Va., company several months after the two companies began private discussions. Blockbuster said it went public because Circuit City had refused to provide access to its books to allow discussions to move forward.
Circuit City Monday said it would continue to evaluate Blockbuster's bid but urged its shareholders to take no action. "We have a number of questions that have not been answered by Blockbuster," a spokesman said.
The move -- made with the strong backing of Blockbuster's biggest shareholder, activist investor Carl Icahn, and the support of dissident Circuit City shareholder Mark J. Wattles -- set off a furious debate on Wall Street. Blockbuster shares fell 10% as investors questioned how the two companies, which have each seen their stocks plunge sharply in the past year, would be better off together.
Blockbuster's move "borders on being reckless," Wedbush Morgan Securities wrote in a research note, adding that Blockbuster had made good progress in its turnaround in recent months, while Circuit City "appears to be in the middle of a death spiral."
Mr. Keyes argued the $18-billion combination would save money and benefit from offering a broader range of entertainment and products, everything from DVD players and flat-screen TVs to video and game rentals.
The sheer audaciousness of Blockbuster's bid -- its market capitalization of $630 million is smaller than that of Circuit City -- highlights how few options there are for the video chain. The video-rental market has been stagnant for years, as consumers have turned to an ever-growing number of alternatives including mail-order DVDs from Netflix Inc., video-on-demand from cable services, or buying DVDs. Under former Chief Executive John Antioco, Blockbuster tried an array of different diversification strategies, none of which made much impact.
Shahid Khan, a consultant at IBB Consulting Group in Princeton, N.J., said Blockbuster has no choice but to seek a new business. "This [bid] is a clear indication that the DVD rental business is pretty much dead or in the process of dying. Blockbuster has to do something radically different to stay in business."
TALE OF TWO CHAINS

Blockbuster is seeking to take on a larger, loss-making company.
Circuit City
Blockbuster
FY07 Sales
$11.74 billion
$5.54 billion
FY07 Net Loss
$321.4 million
$74.2 million
Stores
1,500
7,800
Market Value
$750 million
$630 million
HQ
Richmond, Va.
Dallas
Note: Market values as of April 11.
The bid also shows the influence of Mr. Icahn, who has been actively involved in Blockbuster since winning a proxy battle for board representation in 2005. He is the financing brains behind the deal and has indicated he will arrange the money himself if needed.
"I am more of an operator than a deal maker, and Carl has provided good counsel on how to proceed with the transaction," Mr. Keyes said in an interview Monday.
Also playing a role on the other side of the table is Mr. Wattles, himself a onetime video-rental chain owner who has his own history with Mr. Icahn. Mr. Wattles founded the Hollywood Entertainment video-rental company, which was the target of a bid by Blockbuster in 2004. At the time, Mr. Icahn was a major shareholder in both Hollywood Entertainment and Blockbuster.
Now, Mr. Wattles has launched a proxy battle for Circuit City, seeking to remove the company's CEO, Philip J. Schoonover. Yesterday he said he supported Blockbuster's bid and would press for acceptance of any offer "north of $6 a share."
The bid comes just as Blockbuster emerges from a long stretch of financial turmoil. The company took on a heavy debt load when it was carved off from its former parent Viacom Inc. in 2004.
Carl IcahnMORE

• Deal Journal: More Explanation, Please
• ROI: Look Before You Leap on Circuit City
• Text of Blockbuster's Feb. 17 letter to Circuit City CEO
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As of Jan. 6, Blockbuster had outstanding debt of $758 million. Buying Circuit City would likely add significantly to that debt load.
Mr. Wattles said in an interview Monday that he had spoken to Mr. Icahn by phone and the billionaire investor confirmed he would backstop the deal if needed. "He said, 'I'm available to put the capital up in a rights offering,'" said Mr. Wattles. "Carl Icahn can clearly do this transaction. He wants to do the transaction and is excited about it," he continued.
Mr. Icahn couldn't be reached for comment.
His support enabled Blockbuster to make a cash offer, Mr. Keyes said. However, it's unclear how the deal will be structured, and there may end up being a stock component, he said.
Mr. Keyes, who previously headed the convenience-store chain 7-Eleven, was credited with helping revive that company before he retired in 2005. He came out of retirement to join Blockbuster this past July. He focused on slashing costs and making radical changes in Blockbuster's online strategy. He took steps to improve the availability of titles in stores and also added more merchandise for sale.
His efforts showed signs of paying off in the fourth quarter, when net income more than tripled. On Monday, Blockbuster projected first-quarter net income of $30 million, compared with a year-earlier net loss of $49 million.
Circuit City, meanwhile, has been trying to shore up its fading business amid fierce competition from rivals such as Best Buy Co. and Wal-Mart Stores Inc. It replaced thousands of staff with lower-paid employees, a move that hurt its business.
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Mr. Keyes said he first approached Circuit City last year as he was casting around for potential partners for Blockbuster. He quickly concluded that a partnership wouldn't be enough to achieve the benefits of a combination, and he brought up the idea of an acquisition.
He argued that cost savings alone justify the deal. They include closing some stores where there is overlap, cutting duplication at each company's head office, delivering products to stores more effectively and teaming up on advertising. The plan is to keep a combination of big-box stores and smaller locations.
Mr. Keyes foresees that within six months of the proposed merger's closing, customers would likely see movie and game rentals available at Circuit City stores. Further down the line, he also sees hardware like portable-media players being sold at Blockbuster locations.
Circuit City seemed open to the offer at first, he said. But as talks progressed the electronics retailer started to drag its feet. Mr. Icahn played a key role in the decision to go public with the bid.
Mr. Keyes described the deal as "game-changing" and said for Circuit City shareholders, the offer is "simply too attractive to ignore."
"Our view of the change that's occurring in consumer electronics and the movie-rental business is one of convergence," Mr. Keyes said. He sees Apple Inc.'s stores as an example of "a user-friendly one-stop shop with solutions for the consumers" that could be a model for Blockbuster-Circuit City combination.
Write to Merissa Marr at merissa.marr@wsj.com and Gary McWilliams at gary.mcwilliams@wsj.com

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