No. 5 shareholder makes bid for ailing Circuit City

$3.25 billion offer aims to take retailer private

February 16, 2005|By BLOOMBERG NEWS

RICHMOND, Va. - Circuit City Stores Inc. disclosed a $3.25 billion cash acquisition offer yesterday from Highfields Capital Management LP, its fifth-largest shareholder, which said the No. 2 electronics chain would be more profitable as a private company.

Shares of Circuit City surged 16 percent amid speculation about a higher bid. Highfields offered $17 a share for Circuit City's 191.3 million shares, the Richmond retailer said, a 19 percent premium over Monday's closing price.

"This offer is probably too low," said Mitchell Kaiser, an analyst at Piper Jaffray Cos. in Minneapolis. "Although they had a dismal December, I still think they can achieve some of the goals for themselves. They're pointed in the right direction with revitalizing the stores."

Circuit City posted a net loss for three straight quarters, while No. 1 Best Buy Co.'s profit soared 75 percent during that period. Circuit City is trying to win customers by remodeling stores and relocating or adding as many as 40 locations next fiscal year.

Circuit City said its board would study the offer from Highfields, which owns 6.8 percent, or 12.9 million, of the company's shares. Highfields said it spent $145.3 million on Circuit City shares since it started buying them two years ago.

"Though some steps have been taken to address the company's operating performance, we are nevertheless disappointed that management has been unable to move more aggressively," Highfields Capital's two managing directors wrote Circuit City in a letter Friday.

In the letter, released by Circuit City yesterday, the directors argued that the retailer could better execute a business plan as a private company that doesn't have to disclose its strategy.

David Einhorn, president of Greenlight Capital Inc. in New York, Circuit City's 15th-largest shareholder, said Highfields' willingness to pay a premium for the shares indicates that the company could be performing better.

"It reflects a depressed share price which stems from long-term under performance and an inefficient capital structure," Einhorn said.

Highfields Capital, based in Boston, manages U.S. and international hedge funds. Its two founders and co-managing directors are Richard L. Grubman, a former general partner at Corporate Value Partners, and Jonathon S. Jacobson, who worked at Harvard University, managing its endowment with Jack Meyer.

Grubman and Jacobson declined to comment on the deal, according to Highfields' outside public relations firm. Highfields manages more than $6.5 billion.

Highfields said in the letter to Circuit City that it was working with a UBS AG unit on debt financing and had retained Goodwin Procter LLP as its legal adviser. Circuit City said its board hired Goldman Sachs & Co. as an adviser and would consider other alternatives, which it didn't name.

Circuit City Chief Executive Officer W. Alan McCollough joined the retailer in 1987 and rose to president before being named CEO in 2000. Circuit City also said yesterday that its board had promoted Philip Schoonover, its chief merchandising officer, to president.

"I won't promise anybody a quick fix," McCollough said in a Jan. 6 interview when asked whether he would consider opening more locations with newer layouts to be more competitive with Best Buy. "This is hard work over time with a group of folks dedicated to get the job done. But it's not something that we're going to fire a bullet and cure tomorrow."

After buying shares in Janus Capital Group Inc., Highfields opposed plans by Janus management to pay its top five executives bonuses of up to $15.8 million if they met performance goals during the year. Highfields told Janus that its salaries were too high and demanded more disclosure on fund manager and executive compensation. The company ended its call for change at Janus in May.

Highfields also challenged management plans at Adelphia Communications Corp. and Reader's Digest Association Inc.

Howard Davidowitz, chairman of Davidowitz & Associates, a New York retailing consultant, said the company should take the offer because Circuit City will face increasing competition in coming years from, among others, Wal-Mart Stores Inc. and Dell Inc.

"They'd better take it as fast as they can," Davidowitz said in an interview.

Shares of Circuit City, which has 635 U.S. stores, rose $2.30 to close at $16.53, while Best Buy's stock climbed 82 cents to $55.50.

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