Short Circuit

Phil Schoonover was pretty sure it would be a bad idea to sell Circuit City. At least that's what he told Reuters back in February.

Schoonover came over to Circuit City three years ago from rival Best Buy, to increasingly underwhelming investor enthusiasm. Of course, by the time Schoonover was talking to Reuters, Mark Wattles, head of Wattles Capital Management had disclosed a 6.5% stake in the retailer along with a vague warning that he might press for a sale, or buy more stock, or both, or neither. This had the effect of turning some heads. Wattles owns a controlling interest in Ultimate Acquisition Partners, that, in turn, owns Ultimate Electronics, and that owns 32 consumer electronics stores.

Back in February, Circuit City quickly and aggressively moved to expand its borrowing, a fairly transparent anti-takeover move, even given the company's deteriorating cash position. For a company that had a very limited debt profile, this was unusual. Circuit City's credit line was blown out by $800 million for a total of $1.3 billion with an option to tack on another $300 million whenever they liked. Not bad for a company that earlier that month had a mere $49.7 million outstanding against their credit facility, held nearly $500 million in cash, and commanded sales of only $2.9 billion.

It is probably fair to say that Wattle was irritated by the move. Wattle Capital Management announced on February 25 that they were nominating a slate for five seats on Circuit City's 12 person board.

Schoonover (Swoonover?) responded with a cost-cutting plan (which presumably would reduce the need for Circuit City to take on $1.3 billion in debt) and the prospect of selling some or all of Circuit City's Canadian stores. To say that few people were impressed might even be generous.

Since then, the plot has thickened. Wattles turned up the heat and proposed a total sweep of Circuit City's board on February 29th. Circuit City, desperate to look like they were in control of matters, quickly showed the door to Steven Pappas the Company's "Small Store President," and Peter Weedfald the Chief Marketing Officer. Circuit City had dropped $6 million in bonuses back in December to retain 10 Vice Presidents and another $3 million to retain Executive Vice presidents, including Pappas and Weedfald. Circuit City then declared a $0.04 dividend last week. Too little, too late as the firm now faces being replaced in the S&P 500 by Philip Morris on March 28th. How humiliating. And disastrous for the stock price, as the shares were quickly dumped by institutions holding S&P 500 mirroring portfolios. Firms like Wellington Management and TCW Group turned nearly 20% of the shares over by themselves.

Who stepped in? D.E. Shaw & Co., HBK Investments, Royal Capital Management, and Wattles. The activists are closing in, so you might not want to sell any of the executive corps employment insurance.

Activists Circle Circuit City
[WSJ - Heard on the Street]