Blockbuster Should Jump on Positive Citi Call

Citigroup is out with a pretty huge call on Blockbuster (BBI) saying that despite widespread negative sentiment on BBI's proposed acquisition of Circuit City (CC), they believe the potential deal fits with management's current strategy and see compelling reasons for the merger.

Citi believes it is key to realize that a BBI-owned CC will likely look very different than Circuit City looks today as BBI integrates CC stores into its restructuring plans (including the potential addition of beverage and gaming lounges).

Potential for Meaningful Synergies - Successful integration of CC would likely drive revenue and cost synergies. Citi's conservative estimates, which assume only 2% revenue synergies and modest cost savings, point to incremental EBITDA of $433 million in 2008 and $571 million in 2009.

What's the Stock Worth - Applying pro forma estimates to a 4x '10 EV/EBITDA target multiple suggests BBI could be worth over $8/share (in-line with current target price). However, successful execution of the deal would likely drive investors to assign a valuation to BBI that is more in-line with other retailers (currently 5.1x), which points to the stock being worth almost $11.

Reiterates Buy and $8 target.

Notablecalls: I expect the stock trade close to the $3 level today. This is certainly an out-of-consensus call and will generate ample interest among traders and institutional investors.

Comments

[Davis Freeberg]

In 2005, Blockbuster Video saved themselves from bankruptcy when their ill advised bid on Hollywood Video was blocked by the FTC. Ironically, by failing to approve Blockbuster's bid, the FTC managed to kill Movie Gallery in the process. Now BV wants to bite off more than they can chew again, this time to buy CC. Wattles has suggested that they lever the company up in order to pay for the transaction, but taking on additional debt will only create more problems for both struggling retailers. With the movie industry in such a great state of flux, I just don't see the logic of reducing your flexibility especially in the middle of a recession. If Blockbuster does manage to pull this rabbit out of their hat, I think that it will kill them just like the debt needed to finance Hollywood Video, ended up killing Movie Gallery. I can understand why Blockbuster would want access to CC's discounts on inventory, but I think that Jim Keyes must have been drinking straight out of the slurpee machine when he came up with this one because I can't figure out a better explanation for the brain freeze that's going at Blockbuster headquarters.

[billddrummer]

I wonder whether it was just Slurpee? Maybe some Jack Daniels was mixed in with the syrup????

[valueinvestor123]

I have always believed that the way to save one struggling business is to buy another.