Blockbuster

There haven’t been a lot of developments in the last few weeks on Blockbuster’s (BBI) $6-a-share bid for Circuit City (CC). The stock certainly isn’t trading like a company in play; the Street doesn’t seem to think anything is going to happen.
Arvind Bhatia, an analyst with Sterne Agee, asserts in a research note this morning that Blockbuster is likely to provide an update on its proposed transaction in the next two weeks. He sees three possible outcomes:
Blockbuster proceeds with its bid.
Blockbuster lowers its bid.
Blockbuster pulls its bid.
Given the still troubled financial picture at Circuit City, Bhatia thinks the odds that the company pursues a deal at $6 a share is just 5%.
He sees a 60% chance that Blockbuster lowers its bid. At $4.50 a share, he writes, CC would have an enterprise value of $750 million. Bhatia says financial synergies from a deal could be $500 million to $700 million, which means BBI could argue that they would be buying CC at 1x synergies. (Haven’t ever seen that ratio before.) Nonetheless, he thinks that BBI holders “will need to be convinced there is more to the combination” than cost cutting: they will want to hear a plan for turning CC around.
He also sees about a 35% chance that BBI simply walks from the deal.
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