Blockbuster's hostile bid of $1 billion for Circuit City

DALLAS - Blockbuster Inc., which has been busy trying to fix its own movie-rental business, is making a hostile-takeover bid of just over $1 billion for Circuit City Stores Inc., with dreams of creating a huge chain that would sell electronic gadgets and rent movies and games.

The offer is larger than Blockbuster's entire stock-market value, but chief executive officer James Keyes said that he was confident his company could swing the deal and that the move had the support of one of his board members, financier Carl Icahn, who could help with financing. Icahn did not return calls for comment.

Keyes said combining the companies would create a 9,300-store chain that could sell portable devices and entertainment for them, much like Apple Inc.'s stores. The larger Circuit City stores would have movie-rental stores inside, and Blockbuster locations would offer a selection of electronics.

News of Blockbuster's bid for Circuit City, valued at up to $1.35 billion, sent the struggling retailer's shares up $1.07, or 27.44 percent, to close at $4.97. Blockbuster tumbled 32 cents, or 10.22 percent, to $2.81.

Circuit City, based in Richmond, Va., is the nation's second-biggest consumer-electronics chain, with about 680 stores. The retailer said it doubted Blockbuster could finance the deal and had resisted opening its books.

In South Jersey and Southeast Pennsylvania, Blockbuster has nearly 140 stores; Circuit City has about 25.

Analysts said Blockbuster, which was undergoing its own turnaround, could get more than it could handle in Circuit City. The chain has been fighting a losing battle against rival Best Buy Co. Inc.

"Blockbuster is not thinking through how difficult the big-ticket consumer-electronics business is. It's pretty audacious . . . to the point of potentially reckless," said Michael Pachter, an analyst with Wedbush Morgan Securities Inc.

"Look what happened to CompUSA and Good Guys and Ultimate Electronics," he said, ticking off the names of chains that failed. He said Circuit City could continue losing market share to Best Buy.

BMO Capital Markets downgraded Blockbuster stock. Blockbuster has struggled for several years to compete with cheap DVDs from retailers such as Wal-Mart Stores Inc., video on demand from cable and satellite TV operators, and the by-mail rental service of Netflix Inc.

Since joining Blockbuster last summer, Keyes has dumped online customers who were costing more money than they brought in, and bought Movielink L.L.C., a digital movie-downloading service operated by major Hollywood studios.

Keyes said the moves were working. He said yesterday that the company would report first-quarter net income of $30 million, a dramatic reversal of its loss of $49 million a year earlier. Analysts were expecting a profit of about $20 million.

Blockbuster approached Circuit City in December and sent a letter in February to Circuit City CEO Philip Schoonover offering $6 to $8 a share.

Keyes said he decided to go public yesterday with a bid of "at least $6" a share, a 54 percent premium over Circuit City's closing stock price Friday, after the retailer repeatedly refused to let Blockbuster see its books.

Circuit City said that it had exchanged information with Blockbuster, but that it was not convinced the movie-rental chain could finance its offer.