Investor ponders Circuit City deal

BY LOUIS LLOVIO
Media General News Service
Published: November 19, 2008

The owner of Latin America’s largest chain of consumer-electronics stores could be in line to buy Circuit City Stores Inc. out of bankruptcy.

Mexican billionaire Ricardo Salinas Pliego, who runs Grupo Elektra, bought 30.3 million shares of Circuit City stock last week. He now has a 28 percent stake in the company.

In a telephone interview from Mexico City yesterday, spokesman Luis Niño de Rivera said Salinas was fascinated with Circuit City.

“Circuit City is exactly the type of business he knows. The brand is recognizable, and it has an infrastructure of stores that already brings customers,“ he said.

Grupo Elektra is a chain of about 880 electronics and appliance stores in eight Latin American countries.

Grupo Elektra, according to a report from credit rating agency Dun & Bradstreet, had $39 billion in sales last year and assets worth $82.4 billion.

Henrico County-based Circuit City filed for bankruptcy Nov. 10. In its petition it showed $3.4 billion in assets and $2.3 billion in debts.

Salinas, who with a net worth of $6.3 billion was named one of the wealthiest men in the world by Forbes magazine, also oversees Grupo Salinas, which owns television stations and banks.

He paid 19 cents to 29 cents per share for the 30.3 million shares of Circuit City he bought last week. That purchase, 18 percent of the shares of the second-largest U.S. consumer-electronics retailer, cost no more than

$8.8 million.

Earlier this year, Blockbuster Inc. offered $6 to $8 per share for the company, or about $1.8 billion.

Niño de Rivera, Salinas’ spokesman, said Salinas was interested in Circuit City, but he would not say whether he intended to buy it outright.

“A purchase of Circuit City is possible, but at this time [Salinas] is looking at many options,“ he said.

Edward Morrison, a professor of law at Columbia University who specializes in bankruptcy law, said by controlling such a large share, Salinas can exert influence over the company and its bankruptcy process, including the possibility of gaining a seat on its board of directors.

But by putting himself in that position, Salinas would have a duty to shareholders and creditors that could legally hurt his chances of acquiring the company, Morrison said.

“I would worry about fiduciary duty once he’s gained control,“ he said. “The basic rule of corporate law when a company is solvent is to the [shareholder]. But when a company is insolvent, the duty is to both creditors and [shareholders]. And [shareholders] only get paid after creditors have been paid in full.“

If Salinas is able to acquire the company, he could find himself in a very lucrative place, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York retail consulting and investment-banking firm.

“Buying a company out of bankruptcy gives a tremendous advantage” to an owner who has the capital to operate it once the process is finished, Davidowitz said.

By being in bankruptcy, Circuit City or its new owner would be able to break leases at under-performing stores and negotiate lower rental rates with others, he said.

Also, a bankrupt company has leverage with creditors, such as vendors, to settle debts at a lower amount.

A company coming out of bankruptcy would have a stronger base and little debt, he said.

Salinas could find other benefits as well, Davidowitz said.

“One of the key aspects [of running a retail business] is supplier support,“ he said.

If he could combine his store base in Latin America with Circuit City, even if it’s smaller, Salinas “will have a tremendous advantage over competitors,“ Davidowitz said.

Louis Llovio is a staff writer at the Richmond Times-Dispatch.