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Circuit City Responds To Wattles’ Letter

UPDATE! Richmond, Va. — Circuit City has reiterated its concern over Blockbuster’s ability to finance an acquisition of the CE chain in response to another open letter issued earlier today by activist shareholder Mark Wattles.

Wattles, principal of Wattles Capital Management and Ultimate Electronics, continued the chess game for control of Circuit City by urging its board to accept Blockbuster’s offer or consider other competitive bids.

Circuit City responded again that based on the limited information available, its financial advisor Goldman Sachs believes that Blockbuster could not consummate the proposed transaction given the difficult financing environment.

The retailer said it awaits a “viable financing structure that is predictably executable by Blockbuster given its current constraints of size and capital structure” before it will allow further due diligence.

Circuit has noted that Blockbuster’s total market capitalization is less than the video-rental chain’s $1 billion-plus buyout offer, and is in fact smaller than Circuit’s own market cap.

In its letter to Circuit’s board, Wattles Capital Management outlined reasons why it should immediately provide Blockbuster access to due diligence information and “commence in good-faith negotiations.” The company also demanded that it “simultaneously seek out other parties potentially interested in acquiring or otherwise entering into a material transaction with Circuit City.”

The letter comes more than a week after Blockbuster announced it wanted to acquire Circuit City. The Blockbuster bid had the support of superstar financier and Blockbuster investor Carl Icahn, as well as Mark Wattles, not only a Circuit City investor but boss of Ultimate Electronics and Wattles Capital Management. So far the deal has not received good reviews by financial analysts or the CE industry.

Here is the text of the letter Wattles Capital Management released this afternoon:

Dear Members of the Circuit City Board:

Thank you for meeting with us on April 11, 2008. That meeting and subsequent conversations with Goldman Sachs have caused us to feel somewhat optimistic about the possibility of reaching an agreement that is in the best interests of all shareholders of Circuit City Stores, Inc. (“Circuit City” or the “Company”). However, the announcement on April 14, 2008 that Circuit City’s Board is unwilling to allow what appears to be a bona fide bidder interested in acquiring Circuit City to perform due diligence has justifiably caused some skepticism on our part regarding the current Board’s willingness to take all steps necessary to maximize shareholder value.

In our April 2, 2008 letter to Circuit City’s Board, we urged the Company “not to summarily dismiss any legitimate, third party interest in acquiring or merging with the Company.” We pointed out that “on two separate occasions in the last five years, Circuit City’s Board has rejected what appeared to be legitimate interest in acquiring the Company.” This appears to be exactly what the Board has now done again in failing to actively pursue the offer of $6 to $8 per share made by Blockbuster Inc. (“Blockbuster”) on February 17, 2008. It is partly because of how this Board has responded in the past to potential transactions that could have maximized shareholder value that we have nominated a slate of directors for election at the Company’s 2008 Annual Meeting.

While we can understand the Board’s desire to become comfortable with how Blockbuster would specifically finance this transaction, there are certain reasons why this offer should be taken seriously and why Circuit City should immediately provide access to due diligence information and commence good-faith negotiations:

  • Blockbuster is not a competitor of Circuit City so providing such information poses no competitive threat;
  • Blockbuster’s Board fully supports the offer; Carl Icahn, or an affiliate, appears willing to and capable of helping to finance the offer;
  • Cooperating with Blockbuster’s request to perform “a very short due diligence process immediately” is necessary to answer the very transaction financing questions the Company has cited in its effort to thwart Blockbuster;
  • Blockbuster could raise a significant portion of the financing from Circuit City’s own balance sheet, including, but not limited to, excess cash on hand, a multi-million dollar tax refund due to the Company this summer and proceeds from a potential sale of the Company’s international InterTAN subsidiary;
  • We believe a majority of Circuit City’s shareholders would be in favor of a transaction that provides liquidity at a meaningful premium to the Company’s current share price;
  • James Keyes, Blockbuster’s Chairman and CEO, stated in a letter to Phil Schoonover that the Blockbuster offer is “conditioned upon timely commencement of the due diligence process,” and has subsequently indicated to the media that Blockbuster is unlikely to pursue a hostile bid for Circuit City; and 
  • If Blockbuster withdraws its offer because of a lack of cooperation by the Board, we believe Circuit City shareholders will be immediately and substantially damaged.

As with any potential transaction, there is no certainty that due diligence will ultimately lead to a successful transaction. In this case, given Blockbuster’s strategic offer to acquire Circuit City and Carl Icahn’s ability to help finance a transaction, we believe that due diligence should be permitted. During the due diligence process, the ability of Blockbuster to finance the transaction and the ultimate structure of the financing can be fully fleshed out by all parties. In the meantime, the Board should not take any actions aimed at further rebuffing Blockbuster, imposing roadblocks to the consummation of a transaction, or adopting any plans that make a change of control more costly.

We believe that an acquisition for between $6 and $8 per share is in the best interest of Circuit City shareholders. We urge the Board to act quickly to allow Blockbuster access to due diligence materials and to begin negotiating with Blockbuster so that they can make a definitive proposal at the high end of their offer’s range.

Finally, there might be other parties potentially interested in acquiring Circuit City or otherwise interested in entering into a material transaction with Circuit City, and we demand the Board to take the necessary steps to create a competitive bidding process in order to maximize shareholder value.


Mark Wattles

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