Richmond, Va. — A Boston hedge fund has offered Circuit City $3.25 billion to acquire the company and take it private.
Citing the No. 2 CE chain’s “historical inability to react to the increasing competitive nature of the business,” Highfields Capital Management LP last week made an unsolicited bid of $17 a share, representing a 20 percent premium over Circuit City’s recent trading range of about $14 a share. The firm, which holds a 6.8 percent stake in the retailer, has retained UBS Investment Bank to provide financial advice and debt financing for the deal.
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.”
Chairman/CEO Alan McCollough, who yesterday 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 acquisition offer.
Circuit City shares rose about 20 percent this morning following Circuit City’s announcement of Highfields’ buyout bid.
The offer is Circuit City’s second in 19 months. In July 2003, the company’s board rejected an $8 a share offer by Mexican conglomerate Grupo Sanborns, which at the time represented a 22 percent premium over the retailer’s stock price.
The current bid 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, Circuit City is believed to be losing market share to Best Buy — as well as Wal-Mart and Dell, which have been making increasingly aggressive CE inroads — as evidenced by its December sales results. 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, best known for its activist role at Enron, manages over $6.5 billion.
Separately, Circuit City said the promotion of Schoonover was made at a regularly scheduled board meeting. Schoonover, a onetime senior executive at Sony and Tops Appliance City, joined Circuit City 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 towards building a new Circuit City.”
Also promoted was senior VP/chief financial officer Michael Foss, to executive VP/chief financial officer.