Circuit City gets offer
RICHMOND, Va. — Circuit City Stores Inc., which has lost market share to Best Buy Co. Inc. and continues to report disappointing sales, received a $3.25 billion cash buyout offer from a Boston investment firm known for rattling management at underperforming companies.
The nation’s No. 2 chain of consumer electronics stores said Tuesday that its board of directors will “carefully evaluate” the unsolicited offer from shareholder Highfields Capital Management LP, which contends it has a plan for reversing Circuit City’s fortunes.
“We are convinced that as a private company, Circuit City will be able to effect change more rapidly with fewer constraints,” Highfields fund managers Jonathon S. Jacobson and Richard L. Grubman wrote in a Feb. 11 letter to W. Alan McCollough, Circuit City’s chief executive officer.
Also Tuesday, Circuit City announced that Philip J. Schoonover, who spent about a decade at Best Buy before joining Circuit City last fall as chief merchandising officer, was named president of the company. McCollough, who previously held that title, will continue to serve as chairman and chief executive officer.
Shares of Circuit City soared $2.30, or 16.2 percent, to close at $16.53 in trading on the New York Stock Exchange. The stock, which fell to as low as $10.18 in the last year, traded above $40 a share in 2000.
Highfields’ offer of $17 per share was a premium of almost 20 percent over Circuit City’s closing price of $14.23 on Monday.
The hedge fund earlier won a reputation as a battler during its public confrontations with top managers at several firms, including Janus Capital Group Inc. and Reynolds Metals Co., which was acquired by Alcoa Inc. And in 2001, then-Enron Corp. Chief Executive Jeffrey Skilling famously used an unprintable name to refer to Grubman after the fund manager complained about the company’s inability to produce a balance sheet.
Grubman was previously a general partner of Corporate Value Partners. Jacobson worked at Harvard University until 1998, helping to manage its endowment. When he left, he brought about $500 million of that business with him to Highfields, a Harvard spokesman said.
The private investment firm manages $6.5 billion in U.S. and international hedge funds. Regulatory filings show that its 15.3 million Circuit City shares was its fifth largest holding by market value as of Monday. The largest is a $545.6 million stake in Lagardere SCA, a media and broadcasting company based in Paris.
With little debt and more than $750 million in cash, Circuit City has been considered ripe for takeover. The company turned down a bid of $8 per share from Mexican tycoon Carlos Slim in June 2003.
Lehman Brothers analyst Alan M. Rifkin noted that the retailer announced Slim’s offer only after its board had flatly rejected it. This time, the company issued a public statement before reaching a decision on Highfields’ bid, which “leads us to believe the board is taking this offer much more seriously,” Rifkin wrote in a report.
PiperJaffray analyst Mitchell A. Kaiser is predicting Circuit City ultimately will reject the offer. “We believe (Circuit City) management still feels comfortable with the current status of the execution of their turnaround plan,” he wrote.
About a decade ago, Circuit City was the nation’s largest chain of consumer electronics stores. But Richfield, Minn.-based Best Buy, with prime locations and a sharp focus, overtook the retailer in the mid-1990s. Even in Richmond, Circuit City’s headquarters city, Best Buy opened larger, more vibrant stores that drew crowds of shoppers.
Circuit City has sought to turn around its business by redesigning older stores and relocating poor performers, but the retailer has had little success in catching up to Best Buy.