Blockbuster to rewire Circuit City; airlines look for daylight; CapitalSource bites off Fremont

By Aaron Hochman-Zimmerman

New York, April 14 - Stocks struggled to pick a direction on Monday, just as many deal watchers struggled to understand the bid to buy Circuit City Stores Inc. which was brought into the open by Blockbuster Inc.

Shares of airlines were gaining altitude as Delta Air Lines Inc. and Northwest Airlines Corp. seemed to once again be close to a definitive agreement.

Some analysts believe that a deal between Delta and Northwest may also serve as a catalyst for a mid-air rendezvous between Continental Airlines Inc. and UAL Corp.

In finance, Deutsche Bank AG slid as it looked to shop around its debt to private equity firms while CapitalSource Inc. was looking up after its purchase of part of Fremont General Corp.

Credit manager Clayton Holdings Inc. traded better after it announced that it will be acquired by Greenfield Partners, LLC.

Manufacturer, Cherokee International Corp. dropped upon its announcement that it will explore strategic alternatives.

In fast food, Wendy's International Inc. fell as Goldman Sachs lost confidence in its ability to find a buyer.

The Dow Jones Industrial Average ended off by 23.36, or 0.19%, at 12,302.06, while the Nasdaq Composite Index fell by 14.42, or 0.63% to finish at 2,272.82.

The S&P 500 lost $4.51, or 0.34% to close at 1,328.31.

Circuit-buster?

Shares of Circuit City (NYSE: CC) soared by $1.07, or 27.44%, to $4.97 as Blockbuster (NYSE: BBI) announced its offer of at least $6 per share for the electronics retailer.

The price of $6 to $8 per share represents a level 54% to 105% above Friday's closing, a market source said.

Shares of Blockbuster sank $0.32, or 10.22%, to $2.81.

The initial offer was only acknowledged Monday, but it was presented to Circuit City chief executive officer Philip Schoonover on Feb. 17.

The offer was made public after Circuit City failed to respond, a market source said.

Blockbuster said the $18 billion entity that would be created if the merger goes ahead would capitalize on synergies between the two by combining a hardware retailer with a media content provider.

"At Blockbuster, we have successfully deployed a series of strategic initiatives designed to provide our customers with convenient access to media content," chairman and chief executive officer Jim Keyes said.

"These strategic initiatives have already improved our financial results. Driven by strong performance in our domestic same-store revenues, we expect first quarter 2008 adjusted EBITDA to be approximately $110 million versus $23 million for the same period last year. Additionally, net income for the first quarter of this year should be $30 million compared to a net loss of $49 million for the first quarter of 2007," he said.

Circuit City responded publicly to Blockbuster's offer with doubts that the intended buyer could come up with the money for the deal.

"Circuit City, Blockbuster and their respective financial advisors have been in a process of exchanging information regarding the proposal, but to date Blockbuster has been unable to satisfy Circuit City and its advisors that Blockbuster's proposal could be financed," the company said in a news release.

"In particular, Blockbuster's proposal appears to contemplate a rights offering of unprecedented size relative to the issuing company's market capitalization and at a price that is at a significant premium to Blockbuster's current market price," the release continued.

However, the Wall Street Journal reported that major Blockbuster stakeholder, Carl Icahn, intends to support Blockbuster's rights offering.

During its investor call Monday, Blockbuster said the "best case scenario" is a closing by the Jan. 1, 2009, a market source said.

Break in overcast for airlines?

Shares of Northwest (NYSE: NWA) tacked on $0.26, or 2.37%, to $11.22 while shares of Delta (NYSE: DAL) added $0.47, or 4.70%, to end the day at $10.48 as a finalized merger agreement seemed imminent once again, reported the Minneapolis Star Tribune.

The final approach faces crosswinds from pilots who have not agreed to a blended seniority ladder and lawmakers who have concerns over competition in the industry.

Rep. James Oberstar, D.-Minn., chairman of the House Transportation and Infrastructure Committee, opposes big airline mergers and may face pressure from the pilots to ground the deal, the New York Times reported.

Elsewhere, if the merger is completed Northwest will be forced to surrender its interest in Continental (NYSE: CAL) which would allow it to pursue a merger with United (Nasdaq: UAUA) the Chicago Tribune reported.

The issue of pilot seniority is not expected to be as prohibitive to a Continental-United deal, the report said.

Continental stock lifted $0.27, or 1.25%, to close at $21.89 while United stock was better by $0.71, or 3.10%, to finish the day at $23.61.

A market source joked about whether or not flight attendant seniority will hold up the deal this time.

"Airlines need to merge," he said. "This has been fact for the last 35-plus years and never seems to happen."

Deutsche shops debt

Shares of Deutsche Bank (NYSE: DB) slipped $0.22, or 0.19%, to end at $115.10 as it looked to sell $20 billion of leveraged buyout-related debt to a group of investors, the Wall Street Journal reported.

The investors' group, which includes the Blackstone Group (NYSE: BX), the Apollo Group and the Texas Pacific Group, has also expressed interest in Citigroup's (NYSE: C) debt, a market source said.

CapitalSource takes slice of Fremont

Shares of CapitalSource (NYSE: CSE) launched up $1.44, or 13.74%, to $11.92 as it announced plans to buy 22 bank branch offices and take on $5.6 billion in deposits from Fremont Investment & Loan of the Fremont General Corp., according to a press release.

The sale does not represent a sale of the entirety of Fremont beyond the 22 offices and $5.6 billion in deposits.

"We have long sought deposit funding as a way to further diversify and strengthen our funding platform. This transaction will accomplish that objective in an optimal and expeditious way," Thomas Fink, CapitalSource chief financial officer said in a press release.

"Forming the new bank and acquiring branches with $5.6 billion in deposits will enhance CapitalSource's liquidity profile, increase our profitability and improve our capital efficiency," he said.

Cherokee exploring options

Shares of the Cherokee International Corporation (Nasdaq: CHRK) slipped $0.13, or 6.67% to $1.82 as the designer and manufacturer of power supplies announced it will explore strategic options with the help of Stephens Inc., according to a press release.

The board has not established a schedule for any future deal, but the "board and management are exploring all strategic alternatives available to the company. We are working closely with a number of outside professionals to ensure the maximum benefit to our shareholders and all of our other stakeholders including customers, employees, suppliers and bondholders," said Jeffery Frank, chief executive officer and chairman of Cherokee International.

Clayton Holdings sells

Shares of Clayton Holdings (Nasdaq: CLAY) jumped $0.90, or 18.67%, to $5.72 as it announced it will sell to an affiliate, Greenfield Partners LLC for $6 per share or $134 million and the transfer of $23.8 million in debt, according to a press release.

The price is a 24% premium over Clayton's closing price last Friday.

"We are excited to have reached an agreement to acquire Clayton. As a leader in credit risk and transaction management, the company provides a host of value-added services to leading capital markets firms, lending institutions, fixed income investors and loan servicers," said Eugene A. Gorab, president and chief executive officer at Greenfield Partners.

Where's the beef now?

Shares of Wendy's (NYSE: WEN) trimmed $0.65, or 2.80%, to end the day at $22.58 as Goldman Sachs downgraded the stock to 'sell' believing a sale of the company is unlikely, a market source said.

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