Wall St. scratching head over latest Circuit offer

DALLAS —Blockbuster Entertainment’s offer to buy Circuit City in a potential deal worth more than $1 billion generated plenty of buzz this month, but it isn’t likely to happen, according to analysts who say a merger just doesn’t make sense.

Just weeks after Circuit City hired Goldman Sachs to look into sales opportunities for the chain, Blockbuster revealed in early April that it had already made an offer for the struggling retailer. A February letter that Blockbuster ceo James Keyes sent to Circuit City ceo Philip Schoonover suggested the pairing would create a new kind of home entertainment retailer.

“The combination of Blockbuster and Circuit City will result in an $18 billion retail enterprise uniquely positioned for the convergence of media content and electronic devices,” wrote Keyes. “Our vision for the ‘new’ Blockbuster is to be the most convenient source for media entertainment.”

But the proposal generated more skepticism than interest among analysts who questioned how the two struggling chains would help each other, bringing up comparisons to the merger of Kmart and Sears. “I can see where Blockbuster would view Circuit City as a cheap asset and as a source to sell more CE products in stores,” said Andy Hargreaves, an analyst with Pacific Crest Securities. “But, on the other hand, those synergies are shaky at best.”

Michael Pachter, an analyst with Wedbush Morgan Securities, suggested that Blockbuster “is not thinking through how difficult the big-ticket consumer electronics business is” and called its offer “pretty audacious.”

And there’s also a question of whether Blockbuster can raise the money to buy Circuit City for the proposed offer of $6 to $8 per share. The chain is expected to post earnings of about $30 million for its first quarter ended March 31, but is saddled with a declining DVD rental market and too many stores.

In a statement, Circuit City raised the same question. “Circuit City and its advisors have a number of fundamental questions regarding the structure, sources and uses of funds and consents required with respect to the proposed transaction.”

And the offer would have to be accepted by the Circuit City board. “It would make sense if Blockbuster gets a great deal, but you have to wonder if the board of directors [at Circuit City] would accept an offer of $6 per share,” said Hargreaves.

It wouldn’t be Blockbuster’s first foray into consumer electronics. It has dabbled in selling video game consoles and DVD players in stores for years and in 2001 tested 130 store-within-a-store RadioShack locations, a venture that ended after just six months.