Blockbuster launches $1bn bid for US retail chain Circuit City

Blockbuster, the most famous name in DVD rentals the world over, has launched an audacious bid to turn itself into a retailer, with a $1bn-plus bid for one of the US's biggest electronics chains.

Jim Keyes, Blockbuster chief executive, revealed he had made an offer for Circuit City, the loss-making retailer with 680 stores, and yesterday he appealed to Circuit City shareholders to put pressure on it to enter talks.

Circuit City sells TV and video equipment, hi-fis and computers, as well as CDs and DVDs. Under Mr Keyes, Blockbuster has been reducing the amount of space it gives over to rentals and increasing stocks of DVDs and computer games for sale, but analysts were taken aback by his plan to move squarely into the retail sector.

Colin McGranahan, analyst at Sanford Bernstein, said the rationale was vague, and he described "the oddness of the combination" in a note to clients. "Strategically the deal appears to us to be a long-odds attempt by Blockbuster to address its deep structural issues," he said. "We do not see significant synergies."

But Mr Keyes launched a robust defence of the idea on a conference call with investors yesterday, suggesting he envisioned Blockbuster becoming "a user-friendly one-stop shop with solutions for consumers" akin to Apple's wildly popular high street stores. "Our view of the change that's occurring in consumer electronics and the movie-rental business is one of convergence," he said.

Blockbuster was founded in Dallas, Texas, in 1985, and has grown to have more than 8,000 video rental stores around the world, including 700 in the UK, where it has 4.2 million members. However, in the past decade it has struggled to stay in the black, pressured by competition from mail-order DVD services such as Netflix. Analysts have also fretted that its rental business could go into a tailspin if customers begin to download movies in future years.

The Blockbuster bid would be pitched at between $6 and $8 per Circuit City share, valuing that company at between $1.01bn and $1.35bn – more than twice its value before the approach was made public. Blockbuster itself is worth just $560m, and Circuit City's chief executive, Philip Schoonover, has so far refused to open the books for detailed negotiations, saying he doesn't believe Blockbuster can afford to do the deal.

"In particular, Blockbuster's proposal appears to contemplate a rights offering of unprecedented size relative to the issuing company's market capitalisation, and at a price that is at a significant premium to Blockbuster's current market price," Mr Schoonover told shareholders yesterday. "Most rights offerings, of which there have been very few in the United States, occur at discounts to market."

The Circuit City chief exec-utive is under pressure to sell the company, in particular from one of his largest shareholders, Mark Wattles. Mr Wattles, founder of the DVD rental chain Hollywood Entertainment, is trying to force his own representatives on to the board and to get Circuit City to put itself up for auction, after losses last year of $321m.

Goldman Sachs has been hired by Circuit City to consider its options. The company's shares surged 29 per cent yesterday on hopes for a takeover.