Can One Afford The Other?

Do two struggling companies make for one good company (or just an OK company)? That is the question that Blockbuster and Circuit City may get to find out ...... that is if Blockbuster can convince Circuit City that it has the goods (ie., financing). Per the WSJ and elsewhere, Circuit City confirmed that it received an unsolicited bid from Blockbuster to acquire CC for $6 per share. Apparently, the proposal calls for a "rights offering" of such a size relative to the issuing company's market cap and at a price that is a premium to Blockbuster's current share price. Both hurdles indeed. Most rights offerings occur at a discount to the market value. Of course for many, due to their limited use, this begs the $64,000 question ...... "What is a rights offering." In a nut shell, a rights offering involves issuing rights to a the shareholders of a company to buy a proportional number of additional securities at a given price over a given period of time, with the price usually at a discount. Clear now? What the offering does is allow a company to raise money by selling new shares of stock to the public. Like a secondary offering, it raises money by selling shares, but now the shares are sold directly to existing shareholders. Now how do you get shareholders to buy more shares from the offering, when they can just go into the market? You offer them at a discount. What if the price is at a premium? Your success is less. What if the amount of the offering is high compared to your current market cap? Even less success. Now we know why CC is concerned. To make matters worse, BBI is down over 10% in the market today. Dilution has that effect. On the other hand, CC is up. Does the offer imply that CC is worth at least $6 per share. The market certainly thinks so (well, not quite $6, but up). What happens to the CC stock if the deal falls? That will be a question to be answered later.

Tickers: BBI, CC