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Blockbuster To Make Circuit City Offer It Can't Refuse, Or Refuse To Make Offer?

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Electronics chain's poor results could force a rethink.

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In mid-April video rental chain Blockbuster (BBI) made an unsolicited offer for electronics retailer Circuit City (CC). The price: At least $6 per share in cash. News of Blockbuster's interest seemed to give hope to weary Circuit City shareholders that a way out was possible.

But on Monday some of that hope likely turned to grief. According to CNBC, Sterne, Agee & Leach analyst Arvind Bhatia voiced his opinion that "weak Circuit City results could lead Blockbuster to alter its takeover bid."

Presumably, the results Bhatia is referring to are the electronics chain's first quarter numbers, which were released on June 19th. The Virginia-based Circuit City reported a loss of $164.8 million, or a buck a share, for the quarter - markedly lower than the $54.6 million, or 33 cent per share, it lost in the comparable period a year ago. Moreover, its same-store sales were down 11.3%.

Bhatia may be right. At this point, what motivation does Blockbuster have to pony up $6 per share or better (a more than 70% premium above the current market price) for a company that's performing at such a low level? With industry-wide discounting and markdowns -- and the consumer's general reluctance to spend big bucks on big- ticket gadgetry -- it's not like things are going to get better in a hurry.

For purposes of comparison, in the first quarter its nemesis, Best Buy (BBY), reported earnings of $179 million, or $0.43 per share, versus $192 million, or $0.39 cents, for the same period one year ago. Plus, comparable sales were up 3.7%.

Circuit City's cash flow situation is, apparently, another area of concern. CNBC quoted Bhatia as saying, "The burn rate had been much higher than we had expected."

At the end of the first quarter, Circuit City reported cash equivalents and short-term investments of roughly $92.2 million. That compares to about $364.1 million at the end of the first quarter last year. The last thing Blockbuster should concern itself with now is potentially raising money or possibly pouring a bunch of dough into a money-losing enterprise. After all, it's engaged in a battle with Netflix (NFLX) for the hearts and minds of movie renters everywhere.

So, what would happen to Circuit City's stock if Blockbuster were to back off completely? My take: The stock could come down as much as 50% from current levels as restless retail and institutional investors bailed. Of course, at 50% of the current price, I wouldn't be the least bit surprised to see another suitor step up to the plate. The again, Circuit City wouldn't be negotiating from a point of leverage if that were to happen.

Blockbuster closed flat at $2.52 on the day Monday, but was up $0.16 cents in after-hours trading. Circuit City closed at $3.37, down $0.91 cents, or 21.26%, per share.

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No positions in stocks mentioned.

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