By Karen Jacobs and Sue Zeidler
ATLANTA/LOS ANGELES (Reuters) - Blockbuster Inc
While Blockbuster touted the move as a strategic combination of retailers focused on electronics and digital media, investors were skeptical, and shares of the video rental chain fell more than 16 percent in afternoon trading.
Circuit City shares rose $1.17 or 30 percent to $5.07, but the company said Blockbuster had been unable to satisfy concerns that it could finance the bid of $6 to $8 a share, which was first made in a letter in early February.
The higher end of the range would be more than double Circuit City's recent stock price but less than half the 52-week high of over $19 at which it traded last year.
"I think (Blockbuster is) trying to steal a company and take advantage of shareholders at Circuit City who don't really understand the value of the business," said Dennis Bryan, a partner and portfolio manager with First Pacific Advisors, which owns Circuit City shares.
Sanford Bernstein analyst Colin McGranahan called Blockbuster's strategic rationale "vague" and pointed to the "oddness" of the combination.
"Strategically the deal appears to us to be a long-odds attempt by Blockbuster to address its deep structural issues; we do not see significant synergies," McGranahan wrote in a research note.
Blockbuster said a merger of the two struggling retailers could cut costs, exploit the growing convergence of media content and electronic devices, and bring benefits from selling complementary products.
Circuit City said that while it was open to further talks with Blockbuster, it was unwilling to let the movie rental firm examine its financial books.
"Can Blockbuster even get the financing?" asked Joseph Feldman, an analyst with Telsey Advisory Group.
Blockbuster Chief Executive Jim Keyes told reporters he was confident that his company could complete the transaction. But as of January 6, the company only had $184.6 million in cash on its balance sheet, according to its most recent filing.
Keyes said he had discussed the bid with Blockbuster shareholder Carl Icahn and had his support. Turning to the billionaire investor and activist for an "additional equity infusion" is one avenue the company could consider, Keyes said.
Cost savings would come from combining systems and back-office operations, the "rationalization of the companies' real estate," and better deals with vendors, he said.
Both companies have been struggling against formidable rivals that are changing the nature of their respective marketplaces.
Blockbuster, which has 7,800 stores worldwide where consumers rent movies, has had to modify its business because of new video distribution models -- from rival Netflix Inc
Meanwhile Circuit City, with nearly 700 U.S. stores and 779 retail outlets in Canada, is facing a proxy fight against industry investor Mark Wattles, and it has suffered from an onslaught of competition from Best Buy Co Inc
Blockbuster said it had made the offer in a February 17 letter to Circuit City Chief Executive Philip Schoonover, but decided to go public after the retailer did not open its books.
Keyes, a former CEO of 7-Eleven, was hired last year with a mandate to turn around Blockbuster. He has shifted Blockbuster's emphasis from online and traditional video rentals to in-store sales of DVDs and other media, such as video games.
Since taking the helm in July, Keyes has touted the long-term potential in the chain's brick-and-mortar stores and pulled back on the company's aggressive and costly rivalry with Netflix for the online DVD rental market.
The restructuring has started to help Blockbuster, which posted a narrower-than-expected loss in the fourth quarter and has said it expects to be profitable in 2008.
For instance, Blockbuster said it expected to report a profit of $30 million for the quarter that ended April 6.
Blockbuster bought Movielink.com last year and has said it plans to make movie downloading to televisions available.
Circuit City investor Wattles has demanded that the company remove CEO Schoonover immediately and nominated five people for election to the board at this year's annual meeting.
Wattles has said Circuit City not only needs new management but should also focus on overhauling its existing stores and consider selling itself.
Circuit City shares have slumped to multiyear lows in the past year as it has made store changes that hurt sales, including the replacement of more than 3,000 workers with lower-paid employees. It posted a quarterly profit last week after a string of losses.
For the first quarter, Circuit City expects its pretax loss from continuing operations to widen to $180 million to $195 million from a year earlier. The retailer has said it did not expect year-over-year performance to improve until the second half of its fiscal year, which began on March 1.
Blockbuster's shares were down 51 cents, or 16.3 percent to $2.62 in afternoon New York Stock Exchange trading.
(Additional reporting by Aarthi Sivaraman, Franklin Paul, Martinne Geller and Nicole Maestri in New York; Editing by Lisa Von Ahn and Gerald E. McCormick)