Blockbuster-Circuity City: An Odd Combination

4/14 - "At $6, this (deal) values CC at an EV/sales of 0.06x on just reported FY08 results. This compares to the hardline average of 0.57x...CC did not generate positive
EPS of EBITDA in FY08, and we do not have it turning positive in at least the next two years, so traditional valuation metrics are difficult."

"With Blockbuster having 7x as many stores as CC, we believe this implies that 90% of CC stores have 7 blockbusters within 5 miles. Why then would a consumer pass by one of these options to go to a Circuit City store?...Similarly, we do not believe that customers shopping at a Blockbuster store, presumably for movie or game rentals, will have more than just a passing interest in core consumer electronics products. In fact, we remind investors that RadioShack attempted a similar arrangement several years ago, putting RSH kiosks in Blockbusters stores, to limited if any success."

"...longer term, we continue to see CC as a share loser, with Best Buy (BBY- 41.18, Buy) as the most likely beneficiary, and we do not see the CC-BBI partnership stemming the tide of share loss. Also, as mentioned on today’s call, it appears that a combined CC-BBI would rationalize its store base, meaning fewer stores."

"We are maintaining our Hold rating and $4 price target on CC until greater clarity emerges regarding the deal. The culmination of a deal could yield upside. However, the risk is that the deal falls apart on financing or other aspects.