Blockbuster Buyout of Circuit City More Likely

It doesn’t matter that there is no shortage of criticism, questions about the synergies of such a transaction, and legitimate knocks on Blockbuster’s (BBI) deal to acquire Circuit City Stores Inc. (CC). However, it is completely irrelevant from a trading perspective. As BMO Capital Market analyst Richard Weinhart said Friday morning, “Despite how horrific a merger appears to us, these announcements clearly make a union more likely,” and that’s what’s important – a buyout is likely to happen now more than ever.

The announcements Weinhart is referring to are the moves Circuit City made Friday that gave the appearance it is more willing to sell out:

The company announced that it retained Goldman Sachs to assist in exploring strategic alternatives to enhance shareholder value.

It averted a proxy battle by deciding to select three of Wattles Capital Management’s, led by activist investor Mark Wattle who owns 6.5% of the company, director nominees and include them as nominees of the board at Circuit City’s 2008 Annual Meeting.

Most importantly, it allowed Blockbuster to inspect its books.

In April, Blockbuster offered between $6 and $8 per share for Circuit City which represents a decent-sized if not hefty premium still on the table of between 16% and 54% over the current stock price of $5.17. The Blockbuster offer has been treated with skepticism by Circuit City management because of doubts about Blockbuster’s ability to finance such a transaction, but with billionaire investor Carl Icahn, Blockbuster’s largest shareholder at 16%, stepping up to the plate, the situation has changed.

In a letter to Circuit City, Icahn said that if Blockbuster is unable to obtain financing or shareholder approval, he would be willing to purchase Circuit City and then subsequently merge it with Blockbuster. In response to the developments, Circuit City shares are up 6.68% on 16.8 million shares, or nearly double the average trading volume. Wattles, appeared on CNBC early Friday afternoon, and said that there should be progress on the existing deal in “weeks rather than months.”