Experts expect other bidders for Circuit City

BY LOUIS LLOVIO
Times-Dispatch Staff Writer

Published: July 3, 2008

The future of Circuit City Stores Inc. is again in limbo a day after an interested buyer backed out. Stock of the consumer electronics retailer dropped to $2.32, the lowest it has been since November 1990.

Experts who follow the Henrico County-based chain presume a hopeful buyer is on the horizon.

Shares of Circuit City fell 23 cents yesterday after Blockbuster Inc. announced late Tuesday that it was withdrawing a proposed offer for the chain. The stock has lost nearly $2.2 billion in market capitalization since hitting a high of $15.33 a year ago today.

Circuit City said that it would continue to review strategic alternatives, and that it had never depended on a deal with Blockbuster. Circuit City hired Goldman Sachs & Co. in May to help it assess options.

In a filing yesterday, the retailer said lead independent director Mikael Salovaara resigned from the board on June 26 and it agreed to reduce the board size to 14 from 15. The resignation came two days after the company’s annual meeting, where shareholders voted to boost the board size to 15 from 12.

Allen B. King, chairman of Richmond-based tobacco company Universal Corp., was named Salovaara’s replacement. Salovaara served 13 years on the board. His term was to expire next year.

Blockbuster, the nation’s largest movie rental chain, announced in April that it was considering a purchase of Circuit City for between $6 and $8 a share.

“I would imagine there is another buyer out there,” said Tom Arnold, professor of finance at the University of Richmond’s Robins School of Business.

About two weeks ago, Circuit City reported a loss of $164.8 million, or $1 a share, in its fiscal first quarter. The loss was about $100 million greater than during the same period last year. The retailer also suspended its dividend, disclosed that it burned through nearly $272 million in cash since May 2007, and filed for the possibility to raise more cash by issuing stock.

Arnold said Circuit City remains a viable purchase for some company. He said that the chain could be particularly attractive for an equity firm to buy and take private. A private equity firm probably would keep the management team in place and allow it time to complete its turnaround plan, he said.

The reason Circuit City remains attractive, despite recent troubles, is that “its balance sheet is not in complete turmoil and that a turnaround plan the company has implemented hasn’t had a chance to work,” he said.

Circuit City officials would not comment about potential buyers.

Christopher Hovers, an analyst for JPMorgan Chase & Co. in New York, said yesterday that he believes companies are actively looking into Circuit City.

“While this does not guarantee a deal, total buyout or other capital investment, due diligence from others is ongoing,” he said. “The next announcement . . . should indicate the outcome of the overall process.”

Investor Mark J. Wattles, president of Wattles Management LLC, said last week that he expected an announcement from a buyer by the end of this month.

He said he was aware of three suitors reviewing Circuit City’s financial records — one was Blockbuster. Wattles, whose company owns 6.5 percent of the chain, would not disclose who the buyers were or how much investors would get for their shares.

He did not return a call for comment yesterday but said last week that a private-equity firm would be the most interested in Circuit City.