Circuit City Rejects Buyout Bid
In a move certain to disappoint some deal-minded shareholders,
Circuit City
(CC) - Get Report
rejected an unsolicited $17-a-share buyout offer from a Boston hedge fund.
Responding to a
Feb. 11 bid by Highfields Capital, Circuit City late Monday said its board "unanimously determined that further exploring the transaction proposed by Highfields or other sale alternatives would not be in the best interests of the Company's shareholders."
Instead, the Richmond, Va., electronics retailer said it believes it "can best maximize shareholder value by continuing to aggressively implement the strategic, operational and financial initiatives currently under way and contemplated for the future." Circuit City doubled its share-buyback program and said $455 million remains available to repurchase stock.
The news comes as Circuit City shares have run up an impressive 259% over the last two years, in large measure as investors have
speculated that a buyout bid might be brewing. Certainly the company's competitive fundamentals haven't improved nearly that much, judging by Circuit City's loss of market share to rivals
Best Buy
(BBY) - Get Report
and
Wal-Mart
(WMT) - Get Report
.
Indeed, Morningstar analyst Joseph Beaulieu, who values Circuit City at $10 a share using a discounted cash-flow analysis, said in a research note last month on the heels of the Highfields bid that Circuit City "remains an inefficient operator that is destroying shareholder value." He strongly recommended accepting the offer.
To be sure, Circuit City is a better company than it was on Feb. 15, 2003, when it traded for $4.69 a share and was losing money. Now, profits are expected to rise by an average 33% over the next two years, according to consensus estimates reported by Thomson First Call. Sales have also reversed a downward trend and are set to gain an average 6% in the next two years.
Still, Circuit City has regularly reported weakening profit margins and soft sales growth, while Best Buy, the industry leader, has reported strong same-store sales and improving gross margins.
But Circuit City expressed hope that the run-up in its shares would continue even as Best Buy and Wal-Mart continue to loom at its doorstep.
"The Board of Directors, with the help of outside advisors, carefully evaluated all relevant aspects of the Highfields proposal and of a possible sale process, including the significant risks and uncertainties associated with such a process," CEO W. Alan McCollough said. "Among factors the board considered were the company's existing strengths, business opportunities and financial prospects, including the many strategic, operational and financial initiatives already under way to improve the business."
"Less than two years ago, the Board received and rejected an offer of $8.00 per share for the company," McCollough added. "Since that time, the Company has made significant progress in positioning itself strategically, operationally and financially for long-term strength and success."
On Monday, shares of Circuit City rose 13 cents to close at $16.25.