An Associated Press article says industry analysts suspect the cure for what ails Circuit City Stores, Inc. (NYSE: CC) may be a private equity takeover.
There's no doubt in my mind that Circuit City is one sick puppy. The biggest problem I see is that the recent cost-cutting program has ousted salespeople who bring in the customers. And the comments on my posts provide concrete evidence of this dynamic in action.
But at $15.53, CC is valued below the $17-per-share buyout offer that Circuit City rejected in 2005 from Boston hedge fund Highfields Capital. Although some analysts think CC is worth $22 to $24 a share, its April 30 profit warning -- that its loss would rise from about $50 million to $100 million -- makes that price target harder to hit.
So at today's low price, some think a buyout could be a great way to speed up store renovations or relocations and shut down at least 100 less productive stores. Other electronics retailers, including CompUSA Inc. and Tweeter Home Entertainment Group Inc. (NASDAQ: TWTR) -- which may file for bankruptcy -- have announced hundreds of store closings.
With $4 a share in cash and the potential sale of its Canadian operations likely to add another $1 a share, Circuit City is not in imminent danger. But it's at a significant competitive disadvantage -- Circuit City generated an average $593 in sales per square foot last year, compared with $942 at Best Buy Co., Inc. (NYSE: BBY).
Until Circuit City starts taking better care of its employees and customers, I doubt it will see those numbers improve. And a private equity deal might help with that focus.
Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.
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