Wednesday, February 16, 2005

Circuit City to Highfields: "I Think You're Just What I Needed"

Highfields Capital Management, a very good hedge fund out of Boston--one of the first to recognize the behind-the-scenes fraud at Enron--has bid $17 a share for Circuit City, the beleaguered electronics retailer whose current advertising theme is the old Cars song, "Just What I Needed."

Wall Street applauded and bid up Circuit City stock on the apparent belief that Circuit City has the kind of hidden real estate value which has made other hedge funds go after Sears, K-Mart and Toys R Us. Unfortunately, Circuit doesn't have much of what anybody needs, including customers.

Circuit leases its stores, sold off its credit card business a few years ago, and has nothing much more "hidden" than profits, which elude its grasp like thiefs eluded Barney Fife. And Highlands probably knows this.

So I imagine Highlands--very good at running a hedge fund; probably not so good at running a retail chain--is trying to smoke out another bidder to get Circuit's stock off its books and move on to the next idea.

The way I imagine the conversation between Circuit City's Board of Directors and the Highlands people, it goes like this:

Highlands: "We are prepared to make an all-cash tender offer--"

Circuit City Board: "How much?"

Highlands: "As I was saying, we are prepared to make--"

Board: "How much?"

Highlands: "Well, we are prepared to offer seven--"

Board: "DONE."

Highlands: "Don't you want to hear the full price?"

Board: "Uh, sure."

Highlands: "As we were saying, seventeen dollars--"

Board: "A share???"

Highlands: "Er, yes, seventeen--"

Board: "DONE!"


Now, I don't own any Circuit City stock, although I did look at it when it was trading below ten bucks a share, but I could not get around the fact that the Internet even then had begun disintermediating the business of selling commodity electronics products, and Circuit City and its ilk were becoming the functional equivalent of dinosaurs. So I left 70% on the table and I regret not doing the trade, but the disintermediation has intensified, if anything, since then.

I bought a notebook computer last fall at Best Buy, which I figured would be relatively painless but was in fact a horrible, we'll-be-right-with-you/excuse-me-while-I-take-care-of-this-other-customer/would-you-like-a-service-contract-with-that experience. So, a month later I bought an iPod for my daughter, using the Apple web site: it was shipped 2 days later via Fedex. Easiest buying experience ever.

Consequently, I wouldn't own Circuit City at seventeen bucks a share, or sixteen or even fifteen. Memo to Circuit Board: this Highlands bid may be just what you needed. Take the money and run.

1 comment:

Hayseed said...

The irony and cross-breeding in Highfields' bid for Circuit City is astounding. Highfields runs a hedge fund, and as most hedge funds do, they run with some degree of leverage... and they will probably use 80-90% leverage of various levels to finance any bid to acquire Circuit, unless they bring in another equity partner. So, in effect Highfields is using a levered financial entity to borrow even more money, to buy an insurance company in retail clothing, whose overlevered customers use credit 99% of the time to purchase the insurance. And this bid is for a company that is getting its brains beaten out by BestBuy, even though Circuit often has better pricing. Memo to Circuit: 1) go walk around a SuperTarget for an hour and talk to the customers - Target knows how to run a retail store; and 2) if the SuperTarget doesn't hit you between the eyes, TAKE THE BID ASAP AND HEAD FOR THE HILLS!