Blockbuster bids for Circuit City in $1 billion-plus deal

NEW YORK -- There was no ovation for Blockbuster bbi on Monday after it said that it wants to create a nationwide home entertainment power by offering more than $1 billion for Circuit City cc.

Shares in the No. 1 video-rental company fell 10% to $2.81 after it disclosed its interest in a deal — assuming it finds no surprises in the books of the No. 2 consumer electronics chain.

A Feb. 17 letter offered at least $6 a share, a 54% premium over Circuit City's closing price on Friday. Circuit City shares soared 27% to $4.97 Monday on the news.

The plan to blend entertainment hardware, software and service "is a game changer," Blockbuster CEO Jim Keyes says. "As a customer, if you have any experience with digital content, trying to load devices or watch movies on a PC, you're probably thinking: There's got to be a better way. We think we have an opportunity to break through the consumer confusion and frustration."

Circuit City declined to comment but said in a statement that it won't open its books to Blockbuster's "highly conditional" offer without more assurance that Blockbuster can raise enough cash.

Blockbuster says it can sell additional stock, borrow and possibly get help from its largest shareholder, activist billionaire Carl Icahn.

Keyes' offer comes as Circuit City's largest investor, Mark Wattles, leads a campaign to replace the board. The company has struggled to eke out a profit in a weak economy and with growing competition from low-price retailers including Wal-Mart.

Blockbuster also is grappling with rivals including Netflix and as consumers increasingly buy discount-price DVDs instead of renting them.

But Keyes says there's a strong rationale for a deal — and he wants it "in relatively short order." He says things are moving fast in home video: For example, Apple's iTunes recently began to rent digitally downloaded videos. "We will be in (consumer electronics) on our own, or with Circuit City," Keyes says. "The combination simply allows us to accelerate" that plan.

Instead of advertising low prices, a combined chain could attract consumers with a wide range of products and services — much as Apple's retail stores do. "The magic in the Apple Store is bringing hardware, software and service all together," Keyes says. "They make it easy for the consumer."

A deal also would create cost savings from store closings. Circuit City has 693 U.S. stores, and 95% are within 5 miles of one of Blockbuster's 4,855 stores.

Some analysts are unmoved.

"The combination doesn't present the synergy that (Blockbuster) management is suggesting," says Stacey Widlitz at Pali Research. "And that's an understatement." She gives a "less than 10%" chance of the deal going through.