Are you ready to bring more awareness to your brand? Consider becoming a sponsor for The AI Impact Tour. Learn more about the opportunities here.

Blockbuster was once a name synonymous with movie rentals. Then Netflix, the online DVD mailing service, came along and stole some of that luster. Recently, as the transition to digital distribution for home movie rentals/purchases has begun, Blockbuster has seemed almost comically behind. That reputation could get worse with the company’s offer today to buy number two electronics retailer Circuit City.

The $6 to $8 a share dollar cash offer, which could be worth as much as $1.3 billion, simply does not make a lot of sense. Blockbuster notes that the combination would make an $18 billion global enterprise, but a lot of companies can be crammed together and a big number thrown out there; it doesn’t mean they should be.

Both Blockbuster and Circuit City have been struggling amid strong competition from the likes of Netflix and Best Buy respectively. Both have stocks that have been bottoming out recently — Circuit City’s stock was trading at just under $4-a-share before the deal, Blockbuster’s was even worse, closer to $3. If stock prices are any indication, investors don’t understand this deal either — at least for Blockbuster. While Circuit City is soaring, up nearly 30 percent on the news, Blockbuster is tanking, down almost 13 percent right now.

Both companies had some positive news recently. Blockbuster finally appeared ready to take digital distribution seriously with talk about entering the the living room set top box game and saw profit climb on some cost-cutting the company has been doing. Circuit City also cut costs last quarter and pulled in a profit. This deal looks to negate these slight turnarounds.

A private offer is said to have been made before Blockbuster took a page from Microsoft’s book in its pursuit of Yahoo and took the deal public. Now, Circuit City seems just as confused as all of the analysts about the deal. Circuit City has issued a statement questioning if Blockbuster could even finance such a deal:

Among those questions are whether the proposed acquisition would require a refinancing of the existing Blockbuster debt, and if so, what would be the terms and structure of any new debt; how large a rights offering would be required to fund the transaction and what steps Blockbuster has taken to provide a backstop to ensure successful execution of the rights offering contemplated; and what precise internal and external approvals Blockbuster anticipates for a proposed transaction, including approval of the contemplated rights offering by Blockbuster shareholders and registration of the offering with the Securities and Exchange Commission.

Michael Pachter of Wedbush Morgan Securities also questions the financing of such a deal:

Our initial analysis of the deal leads us to tentatively conclude that Blockbuster intends to raise around $500 million through a rights offering, plus an additional $500 – 800 million in incremental debt. The combined company would have around $120 – 150 million of EBITDA before synergies, implying a debt to EBITDA ratio of 6 – 11x. It is not clear to us that Blockbuster will succeed in financing this transaction.

He goes on to note:

We think that Blockbuster’s move is premature, and borders on being reckless. Circuit City runs its business as a “big box” retailer, and its business is particularly challenged by a worsening economic environment, a well-run competitor, and a constantly changing product offering.

One major problem Blockbuster has had in the Netflix world is that its brick and mortar stores cost too much money to operate. That is exactly why it decided to close hundreds of them. Little did anyone know that the plan then included buying another company’s struggling brick and mortar stores.

[photo: flickr/Elise esq]

VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Discover our Briefings.