Posted on 06/26/2003 9:45:22 AM PDT by MeneMeneTekelUpharsin
CHICAGO June 26 (Reuters) - The family of Mexican billionaire Carlos Slim said on Thursday that Circuit City Stores Inc. (NYSE:CC - News) had rejected a takeover offer, sending shares of the U.S. electronics retailer up sharply amid hopes of a higher price. The $8 per share offer from the Slim family, which owns computer retailer CompUSA and a large stake in upscale retail chain Saks Inc. (NYSE:SKS - News), comes as Circuit City struggles with slumping sales and losses in its credit card operations.
The Slim family, whose holdings in Telefonos de Mexico (Telmex) and several other Latin American blue chips help make it the region's richest, said it may consider raising its offer. The family is already the second-largest Circuit City shareholder with about 9.2 percent of the stock. "We reserve the right to be able to make a counter offer at any time or to buy stock up to where the rules allow," spokesman Arturo Elias told Reuters. "The price was good when we made the offer... and also for U.S. Commercial (the holding company of CompUSA) it could be interesting to form synergies with CompUSA," he said.
A Circuit City spokeswoman confirmed the offer and said the board determined it was not in shareholders' best interest. Circuit City, the second-largest U.S. electronics chain, listed about 205 million shares outstanding as of May 31, which would value the offer at about $1.65 billion. Shares of Circuit City were up nearly 8 percent at $8.61 in midday New York Stock Exchange (News - Websites) trading after hitting $8.90, their highest mark since December.
OFFER MADE BY PHONE
A representative of the Slims telephoned Circuit City Chief Executive Officer Alan McCollough on June 16 and proposed $8 per common share in cash to the company's shareholders, according to a filing with the Securities and Exchange Commission (News - Websites) made by the Slim family. The Slims collectively hold 19.05 million common shares of the Richmond, Virginia-based company, making them the second-largest Circuit City shareholders behind American Express Financial Corp.
Two days after the June 16 offer was made, McCollough called the family's representative and said Circuit City's board was not interested in discussing the proposal. The Slim family has a reputation for snapping up low-priced retail assets, but analysts said it was anyone's guess how much they might be willing to pay for Circuit City, or what price might appeal to the electronics chain. "That is the question of the day," said Colin McGranahan, an analyst with Bernstein Research.
"The board obviously supports the CEO and feels there is a logical and executable plan to improve the business," he said. "The value they're putting on the shares is likely based on a much more profitable business down the road." The retailer earlier this month posted lower sales and a loss from its credit card business as personal bankruptcies hit a record high. Circuit City said last week it was looking at all options for the money-losing credit card business. Its bigger rival, Best Buy Co. Inc. (NYSE:BBY - News), posted a strong 11 percent gain in first-quarter sales while Circuit City recorded a 9 percent decline.
Donald Trott, an analyst with Jefferies and Co., said he knew very little about the Slims' tactics, but combining CompUSA and Circuit City made sense. "I claim no insight, but I think logically what you would do is combine the two companies...and probably close down some locations," he said. Trott said he viewed Circuit City shares as fully valued at current levels, unless management is successful in reviving slumping sales. (With additional reporting by Peter Ramjug in Washington and Fiona Ortiz in Mexico City)
Mexicans are absolutely ruthless business people
Yup. They consider American hiring laws the acts of weaklings. They would never give any egalitarian consideration to Anglos. "What's ours is ours, what's yours is negotiable".
...until they return something and get hit with their 15 percent restocking fee.
3 Best Buy rivals look like better buys
The electronics giant dwarfs its competitors. But its stock sells at a premium, while competitors Tweeter, Ultimate Electronics and
Best Buy (BBY) is hands-down the nation’s 800-pound gorilla in home electronics, but better buys abound for investors looking to put money in the group.
Chief among them are three smaller rivals that sell at a good discount to the gorilla. They should bulk up in value over the next two years as they take steps to look a little more like Best Buy and steal business from the leader.
They are: Best Buy’s chief rival Circuit City (CC); Tweeter Home Entertainment (TWTR), which caters to high-end home electronics lovers; and Ultimate Electronics (ULTE), which operates in the Midwest and Southwest
Best of the breed
Of these, Circuit City looks like it offers the most upside for two reasons. First, it’s the largest of the three rivals, with more than 620 stores. That’s a far cry from Best Buy’s 1,900 stores, but it’s still a pretty big base. That means it has a lot to gain from a chainwide makeover it's doing over the next few years.
Second, Circuit City's stock is the cheapest. It has been beaten down badly by tough competition from Best Buy, a weak economy and worries about its somewhat scary credit-card division. The stock traded at $20 at the start of 2002. Last September, when I suggested shorting the stock, it was down to $10. By March of this year, shares had fallen another 55% to $4.
Since those March lows, however, the stock has rebounded by 90% to trade at $7.70. The shares still look cheap to value investors who bought recently. “Circuit City is trading well below its book value of $11,” says John LaForge, who helps run the Phoenix-Hollister Value Equity Fund (PVEAX) and the Phoenix-Hollister Small Cap Value Fund (PDSAX). “Meanwhile, Best Buy is at five times book value. I mean, let’s get serious here, people.”
Circuit City also looks attractive because it has around $3 per share in cash and little debt, says John Buckingham, a value manager with the Al Frank Fund (VALUX). Buckingham, who edits The Prudent Speculator, an investment newsletter often ranked No. 1 by Hulberts Financial Digest, thinks the company could trade up to $14 in two years. He says it’s worth buying anywhere below $7.21.
For the very same reason -- valuation -- many investors are now dumping shares of Best Buy. The stock has shot up past $40 from $20 last November. “Best Buy has moved to a price-earnings ratio of 20, from 10 times earnings, and now it is a little above its historic valuation range,” says one fund manager who plans to close out his position over the next few weeks. “Unless you can tell me we are going to keep going straight up from here, I am inclined to take my profits.”
Here’s why value managers and insiders recently buying shares of Circuit City, Tweeter and Ultimate Electronics think they will reap similar profits as these Best Buy rivals change tactics to steal some of the gorilla’s business.
Circuit City
Circuit City has the most work to do, and the most to gain. It’s essentially taking three steps to look -- and sell -- more like Best Buy.
First, as an older retailer, Circuit City has many stores that show a lot of wear and tear. And often they’re in the wrong part of town -- areas that used to be shopping hubs but aren’t anymore because newer shopping districts have popped up elsewhere.
To correct these shortcomings, Circuit City is in the midst of a fairly aggressive makeover in which stores are remodeled or relocated. If initial results are any indication, the impact could be impressive. Sales at the handful of relocated stores are running 30% above chainwide results, says Ann Collier, who handles investor relations for Circuit City. And remodeled stores are seeing sales increase by around 14%.
So far, only about 15% of stores have been remodeled or relocated. The company hopes to get to around 40% of them in two years, says Collier. Near term, it plans to remodel four stores and relocate up to 22 before the all-important holiday shopping season that starts after Thanksgiving. Circuit City is also carrying out more-limited makeovers in lots of other stores, where it’s putting in new fixtures that allow for better displays and improving lighting. It should have about 200 of these mini-makeovers done by the end of September.
Next, Circuit City recently eliminated commission-based pay, again a step that moves it closer to Best Buy’s way of doing things. That helped bring costs down 9% -- excluding the remodeling -- in the most recent quarter. “They are acknowledging that Best Buy has a better mousetrap in their sales approach,” says one fund manager. “That will help them close the gap.”
Finally, Circuit City confirmed in its conference call last week that the board gave the OK for management to look for ways to get out of its sometimes-volatile credit-card business. That’s good news for investors.
To be sure, a lot of profit comes from the banking division, known as First North American National Bank, which issues Circuit City, MasterCards and Visa cards. It has accounted for anywhere from 50% to 90% of pretax earnings in recent years. So it’s a big part of Circuit City’s earnings story.
The problem is, the credit-card division scares investors for several reasons. First, Circuit City does not release all the details of how it works. Second, profit from this division swings wildly as changes in external credit-market conditions change the value of cardholder accounts that Circuit City can book. For example, the credit-card divisions posted a $20 million loss in the most recent quarter, compared to a $20 million gain a year before. Finally, in this economy, defaults and problem accounts are worryingly high.
In short, a sale of this credit-card division could lift a cloud from over Circuit City stock and net the company $3.68 per share, according to analysts at CL King & Associates, one of the few Wall Street brokerages with a positive opinion of Circuit City. Buckingham points out that shares of Sears Roebuck (S) advanced sharply after it announced plans to sell its credit-card division. “It would definitely clear the story up,” agrees LaForge. “The reason you don’t get a higher multiple is that people don’t fully understand how the credit-card business works because Circuit City is still not divulging everything.”
To be sure, this lack of full disclosure on the credit-card division means there could be more serious problems lurking in there. But LaForge doesn’t think the company would be talking about selling the division if it knew there were serious flaws hidden inside. Besides, he’s more interested in the prospects for the retail business and says Circuit City discloses as much as anyone there.
Tweeter Home Entertainment
Back in February, I wrote in a Market Dispatch item that this high-end home electronics retailer looked like a good buy after Michael Cronin, a director at the company, plunked down $9.25 million to purchase 1.8 million shares at $5. Chief Financial Officer Joseph McGuire and Chairman Samuel Bloomberg were also big buyers around the same time. Since then, these insiders have done well. Tweeter recently traded for $8.25.
But they are still not selling -- presumably because they have high hopes for the advice they’re getting from former Best Buy execs on how to turn around the business after two years of consistent sales declines. In addition to Retail Masters, a consulting group made up of ex-Best Buy managers, Tweeter has also brought in a former merchandising chief at Staples (SPLS), Philo Pappas.
These experts are improving Tweeter’s inventory management, merchandising and advertising at the chain’s 177 stores. They’re also developing a long-term strategy to help Tweeter continue to set itself apart from mass merchants like Best Buy and Circuit City. Tweeter intends to sell more and more high-end home-electronics gear. At around $8.25, the stock trades in line with book value of $8.
Ultimate Electronics
This home electronics retailer based in Thornton, Colo., is taking several steps to improve profits. First, the company is reducing the number of items it carries, eliminating those that move less quickly to increase inventory turnover at its 58 stores. “The full benefits will be seen in the third and fourth quarter and 2004,” says David Workman, the chief of operations at the company. It’s also putting in software systems that can track sales better. Next, the company has decided to stop selling computers; it's using the extra space to stock higher margin video games, cordless phones and digital cameras. It also has plans to roll out smaller stores, which produce higher profit.
At a recent price of $13.25, Ultimate shares trade below book value of $14.40 per share. During the past 10 years, the company traded anywhere from .3 to 4.5 times book value, with a midpoint of 2.4 times book, according to analysts at Dougherty & Co., suggesting room for upside.
Big-picture trends and risks
Two big-picture trends may help spur sales at all these home-electronics retailers. First, cable companies are getting more aggressive in rolling out high definition television (HDTV) in their ongoing battle for subscribers with satellite operators. That should juice sales of new television sets that can handle HDTV technology. “With cable getting on board, that means 70 million households will have HDTV content available to them,” says Workman. There are about 250 million analog television sets to be replaced over the next several years as HDTV technology catches on.
Next, the consumer is spending more on home electronics again. In the most recent quarter, Best Buy’s sales at stores open for a year or more were up by 2.3%. And the government reported recently that consumer-electronics sales in May grew by a seasonally adjusted 2.9% over April, when sales were up just .8% compared to March. Workman says Ultimate Electronics is looking for low-single-digit growth in sales at stores open for more than a year in the third quarter and mid-single-digit growth in the fourth quarter.
Then may I suggest Mark Edleman is unable to read a 10-K.
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