Circuit City's board has decided to pass on the unsolicited $3.25 billion acquisition offer made last month by Boston hedge fund Highlands Capital.
In a unanimous decision, the board said that a buyout by Highlands — or any other party — would not be in the best interests of the company's shareholders, and expressed confidence in management's efforts to revitalize the No. 2 CE chain.
“The company can best maximize shareholder value by continuing to aggressively implement the strategic, operational and financial initiatives currently under way and contemplated for the future,” the board said in a statement.
Indeed, Circuit City has made a series of dramatic changes in the four weeks following Highlands' bid, including shutting 19 underperforming stores, promoting chief merchant Phil Schoonover to president, accepting the resignation of COO John Froman, hiring former Best Buy supply chain/inventory management exec Ron Cuthbertson, reorganizing its management structure, and severing its online sales ties with Amazon.com.
The board has also doubled the size of its stock buyback program to $800 million in an effort to shore up the company's shares.
The rejection of Highlands' $17 a share offer is the second time in two years that Circuit City has shrugged off a buyout bid, having turned down an $8 a share proposal by Mexican business tycoon and CompUSA's owner Carlos Slim.
In a statement, Highfields' managing director Jonathon Jacobson said the firm is “deeply disappointed” by the decision but is prepared continue acquisition discussions. Short of that, he pledged to work constructively with Circuit City's management to protect his firm's 6.8 percent stake in the company.
Analysts, who had generally endorsed the Highfields proposal, questioned whether current management can continue to build on the earnings improvements made over the last 18 months. “We applaud Circuit City for making progress,” observed Banc of America Securities' Aram Rubinson. “But without a top-line turnaround, we suspect that Circuit City's 4 percent internal operating margin target will be more elusive than most had hoped for.”
Dan Wewer of CIBC World Markets suspects that in addition to closing and relocating underperforming stores, the company will focus on improving its supply chain and marketing effectiveness, and may also develop a new store prototype. Nevertheless, he considers the retailer's current stock price “aggressive, given the challenges on Circuit City's road to a turnaround and the headwinds in the sector we see for 2005.”
More to the point was Highlands' Jacobson, who, in an open letter to Circuit City's chairman Alan McCollough, wrote that “Big-box retail is undergoing a rapid transformation, resulting in both consolidation and a newfound resolve to improve the operating metrics of the industry. Regardless of the trajectory of their revenues, your competitors, both direct and indirect, are relentlessly seeking to make significant operating and financial improvements with a sense of urgency that has manifested itself in substantial gains for their shareholders that have been absent at Circuit City over the past five years. While our conversations with new members of management during the last year, and particularly over the last month, have increased our confidence in both their willingness and their ability to address the company's problems, we believe that Circuit City needs to bring even more outside resources to bear as well as more capital discipline.”