Circuit Says OK On Books, Adds Board Members

By Alan Wolf On May 19 2008 - 6:00am

Under pressure from dissident shareholders Mark Wattles and HBK Investments, Circuit City has agreed to open its books to would-be buyers Blockbuster and, possibly, Carl Icahn, and will add three of Mark Wattles' four board nominees to its own directors' slate.

The company also agreed to explore other strategies besides its own turnaround plans, and has contracted with financial advisor Goldman Sachs to evaluate buyout offers.

The decisions amount to a major concession by Circuit City's board, which said it was looking to avoid a costly and disruptive proxy fight. Wattles and HBK together control about 15.5 percent of the company's outstanding shares.

Circuit City had previously resisted Blockbuster's $1 billion-plus buyout offer, citing its questionable financing. But the CE chain said it has since received a letter from Icahn, the billionaire investor and principal Blockbuster shareholder, indicating that he would be willing to buy Circuit City himself if the video rental chain is unable to do so.

Circuit City chairman/CEO Phil Schoonover said the board's change of heart shouldn't be interpreted as an endorsement of the Blockbuster deal. "Let me be clear that our decision to allow Blockbuster and Carl Icahn to conduct due diligence should not be taken as an indication that the board has completed its review of the Blockbuster proposal, that the board has taken a position on the company's value or that it has settled upon a particular strategic course of action," he said in a statement.

"While the Circuit City board has confidence in the company's ability to successfully implement its turnaround plan and generate shareholder value, we believe that we can best serve the interests of our shareholders by exploring all possible alternatives to enhance shareholder value."

The company added that it will not disclose any developments regarding any alternative strategies until a course of action is approved by the board.

In a statement, Blockbuster said it is "pleased to have reached an agreement with Circuit City to conduct due diligence and further explore a possible merger between our two companies. We continue to believe this combination would create significant cost and operating synergies therefore unlocking substantial value for our shareholders."

Separately, Circuit City said it will select three of Wattles' four hand-picked board nominees to stand with its own slate for election at the company's annual meeting on June 24. At least two current directors will either step down or decline to run for reelection next year.

In addition, one of Wattles' nominees, James Marcum, former CFO of Hollywood Entertainment, will join a new executive committee of Circuit City's board. The committee, headed by lead director Michael Salovaara, will work with Goldman Sachs, to weigh all strategic alternatives.

In return, Wattles, through his investment vehicle Wattles Capital Management, has agreed to end his proxy contest; to vote his shares in support of all of the board's director nominees; to limit his stake in the company to 15 percent of outstanding shares; and to abide by certain confidentiality and standstill provisions through the completion of next year's annual meeting.

"We are pleased that this matter has been resolved in a manner that best serves the interests of all Circuit City shareholders," Schoonover said.

Shares of Circuit City rose following the announcements, although analyst reaction was mixed.

"While these events are a positive, we think there is a long way to go before any deal is consummated," observed Lehman Brothers analyst Michael Lasser. Indeed, Lasser doubts that Circuit will be sold due to the difficult structural issues it faces — including poor real estate, high cost structure and questionable strategic actions — compounded by a competitive marketplace and weak economy.

Those issues would likely be exacerbated in a buyout by Blockbuster, which is facing its own turnaround situation, he said.

Circuit's concessions could indicate that trends continue to deteriorate at the company, Lasser speculated, although its board may also have been motivated by Icahn's deep pockets and the possible threat of legal action, he noted.

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