Blockbuster withdraws Circuit City bid

Rental chain will add electronics to DVD selection on its own

By Danny King -- Video Business, 7/1/2008 6:53:00 PM

JULY 1 | Blockbuster today said it withdrew its four-month bid to buy Circuit City after completing its due-diligence process, citing “market conditions.”

The largest U.S. movie-rental chain will instead attempt to add electronics products to its inventory of DVD content, Blockbuster Chief Executive Officer James Keyes said in a statement . Circuit City, the No. 2 U.S. electronics retailer behind Best Buy, said two weeks ago that its fiscal first-quarter loss tripled as same-store sales declines in home-theater installations, video equipment and camcorders more than offset a boost in video-gaming products and a small increase in flat-screen TV sales.

“Based on market conditions and the completion of our initial due diligence process, we have determined that it is not in the best interest of Blockbuster’s shareholders to proceed with an acquisition of Circuit City,” said Keyes in the statement.

Blockbuster in April went public with a two-month-old offer to buy Circuit City for at least $6 a share, laying out a vision of a combined $18 billion retailer of entertainment content and the devices it plays on. Circuit City at the time questioned whether Blockbuster had the financing for the acquisition, though allowed for the company to continue its due diligence.

Investors in both companies appeared to have not favored the proposed merger. Since April 11, the last trading day before Blockbuster announced the bid, its shares had plunged 20% as of the end of regular trading today while Circuit City shares, after an initial jump, dropped 34%. In extended trading today, Blockbuster shares surged 12% while Circuit City stock fell another 14%.

A credit crunch and surge in gas prices helped create a pullback in investment, causing the Dow Jones Industrial Average to drop 7.4% during the second quarter, the largest second-quarter decline since 2002. The Dow is down 20% since its October 2007 record high.

Circuit City in May hired Goldman Sachs to explore strategic alternatives for the company and last month filed for a shelf registration, which facilitates the company’s ability to issue shares.

“Our exploration of strategic alternatives is intended to serve the interests of our shareholders by considering every possible alternative to enhance shareholder value,” said Circuit City Chief Executive Officer Philip Schoonover in a statement today, after Blockbuster announced its withdrawal. “The board's review was not dependent on Blockbuster's participation.”