Blockbuster makes bid to buy Circuit City for up to $1.35 billion

In an effort to diversify itself from the video rental business, Blockbuster hopes to put its weight behind the retail of consumer electronics.

Blockbuster Inc. today publically announced that it has offered to acquire Circuit City for $6 to $8 per share, resulting in a potential buy of up to $1.35 billion.

Although such acquisition deals aren’t normally made quite so public, Blockbuster said in an investors release that Circuit City management has “failed to provide due diligence necessary to allow Blockbuster to make a definitive proposal” and that “shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company.”

The rental juggernaut attached a letter written by Blockbuster head Jim Keyes, addressed to Circuit City chairman and CEO Philip Schoonover and sent on February 17.

“Our vision for the "new" Blockbuster is to be the most convenient source for media entertainment. We have undertaken a series of strategic initiatives including enhancement of our core rental business; a transition from solely rental to a concentration on consumer retail; and development of the fast-growing digital download market,” Keyes wrote, adding that the combination of Blockbuster and Circuit City would result in an $18 billion retail enterprise.

Keyes continued to describe how the two seemingly different businesses would complement one another. “We would seek to differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices. Both companies would benefit from complementary products, marketing, management strengths, technology and distribution and the resulting synergies would significantly improve consolidated financial performance,” he wrote.

In his letter, Keyes requested from Schoonover a response no later than February 21. With that date past, Blockbuster is now turning to Circuit City’s shareholders to determine the future fate of the second largest electronics retailer in the U.S.

“Our proposal offers Circuit City a significant premium to its existing stock price and creates a game-changing retail concept with a sustainable competitive advantage,” Keyes said on Monday. “We believe the combination will result in a compelling consumer proposition that will drive significant revenue and margin enhancements as well as cost synergies.”

Circuit City has fallen on hard times as of late. In 2007, Circuit City had cut hundreds to thousands of jobs in an effort to trim the fat. Dropping its workforce wasn’t enough, however, as the retailer also closed nearly 70 stores in North America.

Major Circuit City investor Mark Wattles, who holds 6.5 percent of the company, said earlier this month that he would like to see new management at the helm. Wattles also suggested that Circuit City might put itself on the market for a potential sale.

Shares of Circuit City soared more than 35 percent to a current last trade of $5.25 on news of Blockbuster’s offer.

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