Blockbuster bids for Circuit City

Blockbuster Inc., attempting to reinvent its outdated video-rental business, has offered more than $1 billion in cash for struggling electronics retailer Circuit City Stores Inc. Blockbuster said it made the offer of $6 to $8 a share in a February letter to Circuit City Chief Executive Philip Schoonover, but decided to go public with it after the retailer refused to provide access to its books.

The proposal is a bold move: Blockbuster would take on a troubled and loss-making company with a greater market value than its own. Blockbuster had a market capitalization of around $630 million, based on Friday's closing price.

Circuit City fired back, challenging Blockbuster's ability to raise financing for any deal, and urging its stockholders to sit tight. In its first public comments on the offer, the Richmond, Va.-based retailer said "to date Blockbuster has been unable to satisfy Circuit City and its advisors that Blockbuster's proposal could be financed." Circuit City raised questions about the company's financing source and structure, adding that it "is unwilling to provide Blockbuster with additional detailed due diligence information and embark on a highly conditional undertaking until [its] questions are answered satisfactorily."

The bid is part of Blockbuster's efforts to transform itself into a one-stop entertainment hub. Combining with Circuit City would significantly boost Blockbuster's retail footprint, giving it a broader customer base to which it could sell a range of video and electronics products. The Dallas-based company brought in a new chief executive, James Keyes, last year to refocus its limping business, which has suffered fierce competition from upstarts such as Netflix Inc., as well as video-on-demand services and movie downloads.

Since taking the reins, Mr. Keyes has been slashing costs and making changes to its online plan, including shedding unprofitable customers by raising prices. Blockbuster has also been improving the availability of titles and adding more merchandise for sale in its stores. The turnaround efforts showed signs of paying off in the fourth quarter, with net income more than tripling. On Monday, Blockbuster projected first-quarter net income of $30 million, compared with a year-earlier net loss of $49 million.

In a conference call Monday, Mr. Keyes said Blockbuster believes that for Circuit City shareholders, the offer is "simply too attractive to ignore." He added the offer has the full support of activist investor Carl Icahn, who holds a large stake in Blockbuster. "Our view of the change that's occurring in consumer electronics and the movie-rental business is one of convergence," said Mr. Keyes. He provided Apple Inc.'s stores as an example of "a user-friendly one-stop shop with solutions for the consumers" that he sees as a sort of model for a combination of Blockbuster and Circuit City.

Mr. Keyes foresees that within six months of the proposed merger's closing, customers would likely see movie and game rental available at Circuit City stores. Further down the line, he also sees hardware like portable-media players being sold at Blockbuster locations. But buying Circuit City is a radical step, if Blockbuster succeeds. Circuit City has also been trying to shore up its fading business amid fierce competition. It replaced thousands of staff with lower-paid employees, a move that severely upset its business.

The retailer's problems have attracted a proxy fight with investor Mark J. Wattles, who has disclosed a 6.5% in Circuit City and demanded the removal of Mr. Schoonover and the nomination of five people to the board. Mr. Wattles has been lobbying for Circuit City to consider selling itself, among other things. In 2005, Mr. Wattles quit as chief executive of Hollywood Entertainment to pursue a buyout of the video-rental chain. After Blockbuster made a hostile offer for Hollywood Entertainment, Mr. Wattles sought to acquire about half the chain's stores. However, Blockbuster dropped its offer when the Federal Trade Commission raised concerns and the chain was later acquired by rival Movie Gallery.

Blockbuster itself was the target of a proxy battle before Mr. Keyes came on board. Mr. Icahn fielded his own slate of candidates for the board and pressured then chief executive John Antioco to step down. Mr. Icahn dropped his proxy battle after reaching an agreement with Mr. Antioco and his management team. Mr. Antioco stepped down last year.