We’re waiting to hear Blockbuster’s (BBI) rationale for offering up to $1.3 billion for Circuit City (CC); the best guess we can hazard right now is that Blockbuster figures its core business is disappearing within 5-10 years, and it’d rather be in a low-margin retail business than none at all. But we don’t imagine they’ll say that out loud.
Call begins: CEO Jim Keyes going over background in press release. Maintains deal still “friendly”. Notes “market has changed some” since Feb. offer, but argues still has cash to deal, and/or could raise more money through stock sale. Says large investors on board, as is Carl Icahn.
Referencing a slide show we can’t access for some reason. Blockbuster “repositioning business model” (i.e. shuttering stores, praying). “Leading provider of movie and game entertainment”, via stores or direct to consumer. “Hardly been standing still” (i.e. look! we announced a deal!). Rationale for deal: Synergy w/real estate, buying power, “cross-merchandising” opporutunities. Preloading devices with movies, subscriptions, etc. Here’s a nice non-summation, in graph form.
Preannouncing BBI Q1 results: Significantly improved EBITDA, net income numbers. EBITDA: $110 million vs. $23 million last year; net income $30 million vs. $49 million loss.
So far we’ve been listening for 20 minutes or so, and have very little idea of what Jim would like to do other than offer “convergence” of some sort. “Digital content” appears to be important, too. Maybe Q&A will clarify things:
Q&A: Why invest in this as opposed to kiosk, other digital strategies you’ve made? A: It doesn’t mean we’re avoiding digital content. It provides “ultimate digital distribution” strategy. This is a “game-changing opportunity.” OK, translation: This basically a play to cross-sell BBI subscriptions at Circuit City.
Accretive/dilutive? Why do deal now when BBI stock hammered? No details offered. Vague talk of “dramatic cost benefits” from “synergy”. Certainly accretive in the long-term. “More to come” but we sure would like to see Circuit City’s financials.
Next steps? Get Circuit City to cooperate w/due dilligence (i.e., purpose of this call). “Candidly, another reason for trying to accelerate this is there are natural distractions associated with this kind of event” so we want to move fast(er).
You’re doing ok at turning around BBI. Why try to turn around two companies at same time? And is cross-selling digital content enough to fix CC? Window closing — “Concept of convergence”, of marrying digital devices with content is going to happen. Apple’s doing it already. So we want to do it, too. [Ed: Problem with this theory: You don’t make consumer devices or control content]. Our take on CC’s dilmena: Caught in between Best Buy and Wal-Mart, have nothing specific to offer in terms of value-add. We think merging with us gives them something BBY and WMT don’t have.
Tons of retail location overlap: Are you talking about shuttering one set of stores? No. Lots of overlap and we can “rationalize” footprint, but we like synergies. Decision to close any stores will be store-by-store.
Bank of Montreal: We think Blockbuster management is awesome! Thanks.
Please explain savings again? Circuit City has very good retail real estate tracker. That’d be nice. Here’s another one:We both advertise a lot. So we could save there a bit, and have a more “compelling point of difference”. Logistics: Some of our retail logistics suck: Costs us 10 to 15% of revenue to get candy bar into our store, should be 4%.
Financing? Debt and equity. Did we mention that Carl Icahn approves? Yes, we did.
What is big picture plan? Operating margin target you think two companies can reach? We have one, but we’re not going to share it with you. Internally modelling it on cost-savings alone, without even adding upside on revenue and margin.
Please explain how you can fund this again, given that no one’s lending money right now? And also please explain upside for Circuit City here Re: Capital — we look forward to telling you about that, one day. Did we mention that Carl Icahn approves of this deal? Re: Circuit City – we can sell their stuff in our stores.
Would you like see our sexy new logo? OK:
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