Updated from 11:17 a.m. EST

A Boston hedge fund proposed taking

Circuit City

(CC) - Get Report

private in a $3.24 billion leveraged buyout, saying the electronics chain can't compete with

Best Buy

(BBY) - Get Report



(WMT) - Get Report

as a public company.

Highfields Capital, a $6.5 billion money manager best known for its activist role at



Mony Group

, offered to acquire the struggling retailer for $17 a share in cash.

Circuit City closed Monday at $14.23, about midway between its 52-week range of $10.18 and $17.87. On Tuesday morning, the stock was up 17% to $16.64. Highfields said that stripping out $5.50 a share of Circuit City's balance-sheet cash, the offer is 33% above the market value of the company's operating business.

As of last week, Highfields was Circuit City's second-largest institutional holder behind Tudor Investment, controlling 15.3 million shares, or about 8% of the company.

Executives of Circuit City said they would carefully consider the Highfields offer and other alternatives, and hired Goldman Sachs as financial adviser.

While Circuit City has occasionally benefited from

market speculation that it is an acquisition candidate, particularly rumors involving



mastermind Edward Lampert, the stock languished after the company reported an unexpected 5.8% decline in same-store sales on Jan. 5.

"We've been expecting some consolidation in this industry, and Circuit City is certainly a primary target in that grouping because they are one of the large companies with a much better franchise value than some of the smaller companies," said Rich Weinhart, a retail analyst with Harris Nesbitt.

"The timing was a bit of a surprise because the business has been in decline for some time and the stock price has been much lower at some points in the last couple of years," Weinhart said.

Weinhart said $17 a share is about 8.5 times trailing earnings before interest, taxes, depreciation and amortization.

In a letter to management, Highfields said the Circuit City is being hamstrung by the withering scrutiny of public shareholders.

"Though some steps have been taken to address the company's operating performance and suboptimal capital structure, we are nevertheless disappointed that management has been unable to move more aggressively," Highfields said. "We attribute this partially to the demands and scrutiny that come with being a public company (i.e., emphasis on monthly sales, quarterly earnings and other short-term targets) and partially to the company's historical inability to react to the increasing competitive nature of the business."

Highfields, which retained UBS as its financial adviser, said it would finance the transaction with senior debt, subordinated debt and equity. The hedge fund referenced one stricture that would be eliminated in a leveraged buyout, in which a company's income is usually used to cover debt interest.

"The company's belief that a significant cash balance should be maintained even though it continues to generate cash severely limits the potential upside to equity holders. We are convinced that as a private company, Circuit City will be able to effect change more rapidly with fewer constraints," Highfields said.

Highfields has a colorful history as antagonist to various boardrooms, most recently trying to block the merger of


(TAP) - Get Report



, of which it is a shareholder. Its profile was raised considerably during the collapse of Enron when CEO Jeffrey Skilling publicly swore at one of its principals on a conference call.

Still, a Midwestern arbitrage fund manager, who spoke on condition of anonymity, believes it will be difficult for Highfields to pull off the deal. He wonders where the financing will come from since many of Circuit City's properties are leased and are not located in the most desirable areas -- something that could make them difficult to securitize.

But an LBO would also open other options for the company.

"If they choose to, they could certainly make some significant changes to management and other areas in the business," Harris Nesbit's Weinhart said. "Regardless of who's running this thing, they're going to have significant challenges facing Best Buy right now."

Simultaneous with publication of the LBO offer, Circuit City said it promoted former Best Buy executive Philip Schoonover to president. The post had been held by CEO Alan McCollough.

Senior writer Matthew Goldstein contributed to this story.