The proposed marriage of Blockbuster (BBI) and Circuit City (CC) always seemed wrong; like two actors that peaked early, fell from favor and were looking for mutual salvation in a questionable, improbable union. It didn’t make sense. It didn’t feel right. The common ground seemed to be troubles, not opportunities.   

Given that, the odds of one company salvaging the other, of Blockbuster resuscitating the struggling business of Circuit City, seemed small. Luckily for Blockbuster shareholders, CEO Jim Keyes reached the same conclusion before he walked the company into the Elvis Wedding Chapel and said “I Do.”

Wednesday, Blockbuster officially withdrew its $1.35billion ($6 to $8/share) offer.   All it took was a close inspection of Circuit City’s books.

The review process began in May after activist investor Mark Wattles, who controls 6.5% of Circuit City, and Carl Icahn, the one-time corporate raider turned shareholder activist, and principal holder in Blockbuster, helped convince skeptics the deal had strategic merit and could be financed.

In twelve months, Circuit City has lost more than 85% of its market valuation. Last month, the company reported a Q1 loss of $164.8 million. That tripled the loss for the same period a year earlier. Sales were also off 7% overall and more than 10% in stores open for more than a year.

Keyes explained the decision in a statement saying, “Based on market conditions and the completion of our due diligence process, we have determined that it is not in the best interests of Blockbuster shareholders to proceed with an acquisition of Circuit City.”

For Blockbuster, the change of plans won’t represent a total change of strategy.  Keyes has said in the past that the company needs to make stores a “destination for entertainment” and he’s sticking to that tact. In spite of continued investor and analyst skepticism, the company remains set on implementing a plan for hybrid stores that will both rent content and sell electronics. Now, they’ll just do it all themselves. “We will pursue this strategy through our Blockbuster stores,” Keyes said.

It seems, despite closing more than 400 (out of more than 7000) stores in the past year, Blockbuster is convinced diversifying from one difficult business (video and game rental) to another (electronics sales) will help their bottom line.

Skeptics, please form a line to the right and enjoy the complimentary popcorn while we wait and see what happens.  From Kiosks to TV Channels to Mobile Downloads to In Store Coffee Shops, Blockbuster has a lot of things running.

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Seth Gilbert

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