While the two companies seem more dissimilar than not, one sells hardware, the other rents software titles - both are battling for life in a digital convergent era where margins are compressed and competition from old rivals and new upstarts is continually stealing market share. But is this enough (as Paul Simon says) to "…marry our fortunes together?" Yes, according to Carl Icahn who has gone on record saying, "I’ve got some real estate here in my bag." (Oh yeah, that was Paul Simon.) What Icahn really said is that his investment group is willing to financially back the idea of a Blockbuster acquisition of Circuit City to the tune of $1.1B or better (up to $1.35B).

Steve Sechrist
Senior Analyst and Editor

Circuit City didn’t take well to the original idea. CEO Philip Schoonover rebuffed a personal letter from Jim Keyes of Blockbuster, who put it all on the table on Feb 17th, with a "time is of the essence" status and a "very short due diligence process." Fast-forward eight weeks and Keyes’ (and/or his board of directors that include Icahn) patience was running thin. There was no response to the letter, and particularly, no disclosure of the financial details the group required to move the deal forward.

After all, Circuit City’s market value (as of April 11) was around $750M on $11.75B in ‘07 sales, a little more than twice the $5.5B sales of Blockbuster, that claims a market value of $630M. But CC is still hemorrhaging cash and reported a net loss of $324M in’07. Blockbuster lost $74M last year, but is due to announce a $40M profit in Q1-08, up from a $49M loss in the same period, one year before in Q1-07.

But speculation is running high that this deal is not about the benefits gained by the two companies merging (1 + 1 > 2), and more about activist share holders like (billionaire-bully) Carl Icahn on the Blockbuster side, and Mark Wattles on the Circuit City side, both recently engaging their respective boards in proxy battles for company control.

Keyes came on board as CEO of Blockbuster, in part due to a proxy battle with Icahn and then CEO John Antioco. Icahn wanted his own slate of candidates for the board and pressured Antioco to step down. The proxy fight ended after reaching an agreement with Antioco and his management team. Antioco was replaced with Keyes, who sent the merger plan with Circuit City the following February. Based on market values as of April 11, the Wall Street Journal reports Icahn controls about 16% of Blockbuster’s Class A shares.

Circuit City investor Mark Wattles of Wattles Capital Management LLC is in the midst of a proxy battle with Circuit City. He has called for the entire Circuit City board to be replaced, and nominated five people to the board. Wattles disclosed owning a 6.5% stake in Circuit City.

But there is more, Wattles is no stranger to the video rental business. In fact, he was the former Hollywood Entertainment (Hollywood Video) CEO. He quit the company in order to buy-out a portion of that business (stores from the Hollywood Video rental chain) when Blockbuster made a hostile take-over bid. Wattles planned to purchase the leftover stores that BB didn’t want - primarily in overlapping geographies. That deal went south, mostly due to FTC concerns over the Blockbuster take-over. Hollywood Video eventually sold to rival Movie Gallery.

Billionaire Icahn has been throwing his weight around boardrooms ever since he made a killing on the back of Michael Milken’s junk bonds - and, most recently, has called for the break-up of Motorola’s wireless handset device group from the more profitable enterprise-mobility business. (See April issue of Mobile Display Report, "As Cell Phone Turns 35 Motorola Suffers," p.39.)

So is this deal the voice of reason — two different businesses, operating in the same hyper-competitive market coming together to enhance shareholder value by providing customers with a unique value proposition that neither can achieve as rapidly alone? Or, is this the machinations of two giant ego’s playing with the lives and happiness of tens of thousands of employees, perhaps hundreds of thousands of share holder’s money and millions of customers - simply because they can, or they think they know better, or probably a little of both?

Perhaps only time will tell. One thing is certain, the video store era is nearing its end as software content is distributed in ever more efficient ways to a growing number of stationary and mobile devices. So whatever happens, don’t expect to see Blockbuster around in its present form too much longer.

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