Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
The combined companies could offer movies, music and other entertainment content from Blockbuster on the TVs, music players and other consumer electronic devices sold by Circuit City, says Blockbuster CEO Jim Keyes.
Video rental retailer Blockbuster Inc. has offered to buy consumer electronics chain Circuit City Stores Inc., aiming to take advantage of the convergence of digital entertainment content and devices best exemplified by Apple Inc.’s runaway success with the iPod music player and iTunes online music store.
“Marrying digital content with devices is going to happen, by us or by others in the marketplace,” Blockbuster chairman and CEO Jim Keyes told analysts today. “Apple clearly has made the most progress in this avenue.”
Keyes painted a picture of Circuit City stores selling customers, along with extended warranties and maintenance contracts, subscriptions to movies, TV shows, video games and other entertainment content from Blockbuster. “For every customer buying a TV set or other form of consumer electronics, Circuit City now can sell a subscription service to digital content from Blockbuster.com,” Keyes said. He said Blockbuster stores also could sell a limited selection of electronics devices provided by Circuit City, and that Blockbuster could place kiosks in Circuit City stores.
The deal would accelerate Blockbuster’s transformation from a video rental company to a provider of digital entertainment, Keyes said. Blockbuster has in recent years launched its Total Access service that lets consumers choose DVDs online for delivery by mail, putting it in direct competition with Netflix Inc., and last year acquired Movielink LLC, which owns thousands of movies and TV shows. More digital content deals are coming, Keyes said today.
But it’s by no means clear Circuit City will go along with Blockbuster’s offer of at least $6 a share, which would value Circuit City at just over $1 billion. Blockbuster disclosed the offer over the weekend, saying that it had extended the offer privately to Circuit City nearly two months ago and was going public now to push Circuit City to begin negotiations. Circuit City acknowledged the offer today and said it would “continue to carefully consider and evaluate Blockbuster’s unsolicited proposal.”
Both companies have had financial woes. The share price of Circuit City, for instance, had dropped from $19 a year ago to under $4 Friday, before Blockbuster made its offer public. Blockbuster, which lost $85.1 million in 2007, reported some financial progress today, saying its net income for the first quarter would be $30 million, a sharp turnaround from a $49 million loss in the first quarter of 2007.
The combination of the two companies, should it occur, would create a company with nearly $2 billion in online revenue. Blockbuster generated $526.4 million in revenue from the web last year, according to an Internet Retailer estimate, while Circuit City reported $1.4 billion in web revenue. Circuit City is No. 17 in the Internet Retailer Top 500 Guide and Blockbuster No. 51. Apple is No. 15 and Netflix No. 18.