Circuit City Gives Up the Fight

The electronics chain puts out the "For Sale" sign, hiring Goldman Sachs to assist on a deal, most likely with Blockbuster

by Pallavi Gogoi

Carl Icahn has agreed to finance Blockbuster's Circuit City acquisition. Michael Nagle/Getty Images

Editor's Note: The original version of the story incorrectly said Rex Stores was among a group of electronic retailers that filed for bankruptcy.

Circuit City is finally throwing in the towel. Confronted with weak sales, impatient shareholders, and a U.S. consumer pummeled by recession, the electronics chain capitulated on May 9 and retained Goldman Sachs to help negotiate a deal. The same day, Circuit City Stores (CC) agreed to allow three board nominees from activist shareholder Mark Wattles to stand for elections (BusinessWeek.com, 4/8/08).

The moves almost certainly presage a sale of the chain, likely to Blockbuster (BBI), where Carl Icahn has stepped up and agreed to finance (BusinessWeek.com, 5/9/08) a Circuit City acquisition. The billionaire—Blockbuster's largest shareholder—has bought into a "game-changing" scheme announced last month in which the troubled electronics retailer would be combined with the troubled movie retailer to create a new national chain selling consumer hardware and software.

Wall Street is dubious, and no other buyers have emerged wanting Circuit City. "[There's] a lack of potential bidders beyond Blockbuster," says Matthew Fassler, an electronics retail analyst at Goldman Sachs (GS). There are numerous reasons buyers beyond Icahn are not lining up. Circuit City is in an extremely competitive business with heavy pressure from Wal-Mart Stores (WMT). At the same time, Circuit City comes saddled with 682 locations, many of which are in poor and underperforming areas, a fact that CEO Philip Schoonover often refers to when discussing his company's poor performance.

Outlook as Gloomy as Consumers'

"While the Circuit City board has confidence in the company's ability to successfully implement its turnaround plan and generate shareholder value, we believe that we can best serve the interests of our shareholders by exploring all possible alternatives to enhance shareholder value," Schoonover said in a May 9 statement. Wattles Capital Management has also supported the idea of Circuit City being sold.

A far bigger problem for Circuit City? Its moribund prospects are likely to turn even gloomier, with U.S. consumer spending in the doldrums and unlikely to recover in the near term. In March, the Commerce Dept. reported that spending grew just 0.1% and much of that was for necessities such as medical care and haircuts, not the electronics gear found at Circuit City and rivals.

Indeed, the competitive pressures are currently so high that even the leader in the business, Best Buy (BBY), is looking to diversify overseas with a $2.1 billion investment in Europe's largest cell-phone retailer, Carphone Warehouse Group (CPW.L) of London. With a market capitalization of $855 million, Circuit City is effectively valued by the market (BusinessWeek.com, 4/8/08) at less than half of Best Buy's investment in Carphone Warehouse.