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Circuit City Considers $3.25 Billion Buyout

2/21/2005 02:00:00 AM Eastern

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Industry Endorses Circuit City Deal

Circuit City is weighing a Boston hedge fund's $3.25 billion offer to acquire the company and take it private.

Citing the No. 2 CE chain's “historical inability to react to the increasing[ly] competitive nature of the business,” Highfields Capital Management LP made an unsolicited bid of $17 a share earlier this month, representing a 20 percent premium over Circuit City's recent trading range of about $14 a share. The investment group, which already holds a 6.8 percent stake in the retailer, has retained UBS Investment Bank to provide financial advice and debt financing for the deal.

In turn, Circuit City has retained Goldman, Sachs & Co. to help it consider the offer and weigh all its options. “The company's board of directors will carefully evaluate the Highfields proposal and other alternatives available to the company,” it said in a statement, “taking into account the potential benefits that may be realized through the company's strategic, operational and financial initiatives, and the risks associated with them.”

Circuit City would not disclose a timeframe for responding to the offer.

Chairman/CEO Alan McCollough, who last week relinquished the title of president to executive VP Phil Schoonover, admonished management and store staff to continue focusing on day-to-day execution while the board mulls over the offer. In the meantime, in an effort to bolster its financial performance, the company has sold off a corporate office building and will close 19 stores, five regional offices and one of its 10 remaining distribution centers by month's end.

Circuit City's shares rose about 20 percent immediately following its announcement last week of Highfields' buyout bid, which was the retailer's second acquisition offer in 19 months. In July 2003, the company's board rejected an $8 a share bid by Mexican conglomerate Grupo Sanborns, owners of CompUSA and Good Guys, which at the time represented a 22 percent premium over Circuit City's stock price.

The current offer was presented to McCollough and Circuit City's board in a letter dated Feb. 11, in which Highfields' managing directors Jonathon Jacobson and Richard Grubman made a case for taking the chain private. “Though some steps have been taken to address the company's operating performance and suboptimal capital structure, we are nevertheless disappointed that management has been unable to move more aggressively. As we discussed on Wednesday, we attribute this partially to the demands and scrutiny that come with being a public company (i.e. emphasis on monthly sales, quarterly earnings and other short-term targets).

“These and other factors make it increasingly clear that the public market will not give full value to the company's established franchise anytime soon, and as a result, we believe that Circuit City may be better suited to execute its business plan as a privately-held company. Such a transformation would eliminate the public-company transparency into the company's operating strategy that is uniquely damaging in a highly competitive industry where Circuit City is going head-to-head with a tough and entrenched competitor.”

Indeed, despite such turnaround strategies as exiting the appliance business, remodeling and relocating stores, and moving to a non-commissioned selling floor, Circuit City has been losing market share since 1999, ostensibly to Best Buy and, more recently, Wal-Mart and Dell, which have been making aggressive CE inroads. Its share decline accelerated this past December when comparable store sales fell 5.8 percent during the height of the holiday selling season, while Best Buy's comps rose 2.6 percent.

Highfields also argued that Circuit City's $1 billion cash balance could be put to better use.

Highfields was founded in 1998 by Jacobson, a star money manager who helped build the investment group into a $6.8 billion concern. The company has a reputation for being a vocal, activist shareholder, having tried to block Molson's just completed merger with Coors, and earning the wrath of Enron's CEO Jeffrey Skilling, who cursed Grubman during a now infamous conference call for questioning Enron's accounting practices. Highfields is Circuit City's second-largest institutional investor, with 12.9 million shares.

Schoonover's promotion to president was made at a regularly scheduled board meeting, Circuit City said. The one-time senior executive at Sony and Tops Appliance City joined the company from Best Buy in October as chief merchandising officer. In a statement, McCollough said that Schoonover “has already made a significant difference and has played a key role in the progress toward building a new Circuit City.”

Also promoted was senior VP/chief financial officer Michael Foss, to executive VP/chief financial officer.

Most of the 19 stores slated for closing this month — located in Illinois, Indiana, Kansas, Michigan, Ohio, Tennessee, Texas and Wisconsin — are within close proximity to other Circuit City units that were added or relocated to more attractive sites within the same markets. The targeted stores accounted for $170 million in sales last year.

The distribution center, a 400,000-square-foot facility in Doswell, Va., will close at the end of the month.

The store and office closings will cost the company about $30 million in lease terminations, fixed asset disposal, severance and other costs after taxes. Expenses associated with the distribution center closing are not expected to be material. Circuit City also pocketed $1.8 million and eliminated $12.6 million in long-term debt through the sale of a building on its corporate headquarters campus in Richmond, Va.

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