Overseas-Minded Best Buy Expresses No Circuit City Interest
Wednesday July 2nd, 2008 / 22h52
By Karen Talley Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Events over the last 24 hours have put the operations of Circuit City Stores Inc. (CC) and rival Best Buy Co. Inc. (BBY) in the spotlight and are raising questions about the electronics retail titans' next steps and the viability of a hook-up. Blockbuster Inc. (BBI) ended its effort to acquire Circuit City for $1 billion-plus on Wednesday, quashing, at least for now, a chance for the struggling retailer to receive aid by being bought. And U.K. retailer Marks & Spencer Group PLC (MKS.LN) signaled that economic conditions in Europe are worsening just as Best Buy has finalized plans to step into that arena in a big way. The developments add to many other pressures, including increased duress on the U.S. economy, more-heated competitive pricing and promotional activity, and changing consumer buying patterns. "Both companies have now received new blows," said consumer retail analyst Andy Hargreaves of Pacific Crest Securities. "The combination of saturation (of stores) in the U.S. market and a weak macro environment here make profit growth difficult to begin with." Of the two companies, though, Circuit City is most affected, Hargreaves said. "The only publicly known potential catalyst for the company, a buyout by Blockbuster, is gone." Blockbuster announced Wednesday that it withdrew its offer to buy Circuit City, saying the purchase would not be a good fit after all, given market conditions and the results of its due-diligence review of the retailer. As a result, it's back to business internally for Circuit City, while the company beats the bushes externally for a new source of assistance. Circuit City, which, in its latest results, posted a wider first-quarter loss and suspended its dividend, has seen its shares lose all but 15% of their market value over the past year. And the company apparently isn't ruling out many avenues of aid, which raises the question of whether it is or wants to talk to Best Buy. Circuit City spokesman Bill Cimino declined to comment on Best Buy specifically, but did say the company could see itself being bought by "another retailer or striking a strategic alliance." Circuit City would also consider going private or hooking up with a venture-capital firm, Cimino said. "We're seeing if there is an opportunity out there that may help us accelerate" a turnaround. If nothing comes through, "we still feel we're on the right track and will continue on," Cimino added. Best Buy declined to comment about the turn of events for Circuit City or whether it might be interested in the company. Best Buy, in fact, appears to be looking overseas for additional expansion. The company, on Monday, finalized its joint-venture agreement with Carphone Warehouse Group PLC (CPW.LN). Best Buy put up $2.1 billion, and U.K.-based Carphone will provide its entire retail business, which consists of 2,400 stores that sell mobile phones. The venture has yet to be named. On the heels of the formal teaming came word that giant retailer Marks & Spencer, which is making a big push into the consumer electronics area, said slumping U.K. sales in a number of areas would hit its profit. Also, U.K. manufacturing activity marked its weakest reading in six and a half years in a report issued Tuesday, the latest in a long line of dismal numbers for the country. Best Buy says it is aware of what it is up against. "We know there are challenges any time a company enters a new market, and that's why we wanted to make sure we entered Europe with an experienced partner," said Best Buy spokeswoman Kelly Groehler. "Today, we are focused on maximizing our new venture" with Carphone. Even though they are going in different directions, both companies feel their fundamental business models are sound. Specialty retailers say they play key roles not only for customers, but for vendors, offering a much broader range of products and better support for choosing them. But Circuit City remains very troubled, said Michael Souers, specialty retail analyst at Standard & Poor's Equity Research. "The company is dying a slow death, and it appears to need some new strategies." Circuit City "should obviously continue to shop themselves around and immediately cease their store growth, which is a tremendous capital drain," Souers said. "The company could also perhaps use some fresh blood," in terms of upper management. As for Best Buy, "I would say it has no intentions" of buying Circuit City, Souers said. "Best Buy should continue to let Circuit City suffer and take share from them rather than buy them out." Best Buy will likely continue to differentiate itself with offerings like its "Geek Squad" of technical troubleshooters and its "Apple Stores," departments dedicated to a number of the tech giant's products and that are staffed by employees with specific Apple training, analysts said. Circuit City shares fell 9%, or 23 cents, to $2.32, in regular trading on Wednesday. Best Buy dipped 29 cents, or 0.7%, to $39.65, and Blockbuster rose 14 cents, or 5.6%, to $2.65. -By Karen Talley, Dow Jones Newswires; 201-938-5106; karen.talley@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=LW9whl%2BCMpgGy0CJvqg%2FuA%3D%3D. You can use this link on the day this article is published and the following day.
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