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Circuit City Considers Purchase Proposal
"RICHMOND, Va. -- Circuit City Stores Inc. has received an unsolicited letter from Highfields Capital Management LP indicating Highfields' interest in pursuing an acquisition of all of Circuit City's outstanding shares at a price of $17 in cash per share, officials announced earlier today. The Highfields proposal, contained in a letter dated Feb. 11, is subject to a number of conditions, including completion of due diligence, agreements with management and the negotiation of a merger agreement.In the letter, officials state that Highfields Capital believes that to increase shareholder value, Circuit City may be "better suited to execute its business plan as a privately-held company. Such a transformation would eliminate the public-company transparency into the company's operating strategy that is uniquely damaging in a highly competitive industry." Circuit City's Board of Directors will carefully evaluate the Highfields proposal and other alternatives available to the company, taking into account the potential benefits that may be realized through the company's strategic, operational and financial initiatives, and the risks associated with them, said W. Alan McCollough, chairman and chief executive officer. Circuit City has retained Goldman, Sachs & Co. to assist the board in its evaluation."While the Board evaluates the Highfields proposal with the help of outside advisers, we on the Circuit City management team, as well as our more than 40,000 Associates across North America, must and will focus on continuing to meet the needs of our customers and business partners, continuing to implement steps aimed at improving our strategic, operational and financial performance and, in turn, achieving our No. 1 goal: building value for our shareholders," McCollough said. The full text of the letter from Highfields Capital follows:Thank you for taking the time this week to meet with us. We appreciate the frank discussion and your candor about the challenges facing Circuit City. Since we first became shareholders of the company back in 2003, we have spent considerable time discussing with management the steps we believe necessary to increase shareholder value. We have appreciated the opportunity to express our views to you, your management team, and Jim Hardymon, and we are encouraged that you all believe the status quo is not acceptable.Though some steps have been taken to address the company's operating performance and suboptimal capital structure, we are nevertheless disappointed that management has been unable to move more aggressively. As we discussed on Wednesday, we attribute this partially to the demands and scrutiny that come with being a public company (i.e. emphasis on monthly sales, quarterly earnings and other short-term targets) and partially to the Company's historical inability to react to the increasing competitive nature of the business.These and other factors make it increasingly clear that the public market will not give full value to the company's established franchise anytime soon, and as a result, we believe that Circuit City may be better suited to execute its business plan as a privately-held company. Such a transformation would eliminate the public-company transparency into the company's operating strategy that is uniquely damaging in a highly competitive industry where Circuit City is going head-to-head with a tough and entrenched rival. Finally, the company's belief that a significant cash balance should be maintained even though it continues to generate cash severely limits the potential upside to equity holders. We are convinced that as a private company, Circuit City will be able to effect change more rapidly with fewer constraints.To this end, based upon publicly available information, Highfields Capital is prepared to pursue an acquisition of all of the outstanding common shares of Circuit City for $17.00 in cash. This offer represents a premium of over 20% both to last night's close and the average closing price of Circuit's [sic] City shares for the last twenty trading days. Taking into account what we estimate to be the company's current cash balance of approximately $5.50 per share, our proposal represents a 33% premium to the market value of the company's operating business. This price provides liquidity to Circuit City shareholders at a substantial premium.We have retained UBS Investment Bank as our financial advisor and Goodwin Procter LLP as our legal advisors. We are also working with UBS to provide debt financing. We would envision financing the transaction with a combination of senior debt, subordinated debt and equity. As you know, Highfields Capital manages over $6.5 billion, and in addition to our investments in the public markets, we have sponsored and participated in several other going-private transactions and private equity investments. Our proposal is subject to: (a) completion of customary business, legal and accounting due diligence, (b) customary agreements with management, (c) negotiation of a satisfactory Merger Agreement, and (d) Hart-Scott-Rodino clearance.We ask that you forward this letter to your fellow Directors for their review, and we look forward to hearing from the Board shortly. We are prepared to proceed expeditiously toward satisfying the conditions necessary to reach agreement and consummate such a transaction. Our full team is available to answer questions, begin detailed discussions and move forward immediately. We hope such a process will result in a transaction that is in the best interests of both Circuit City and its shareholders.Very truly yours,Jonathon S. JacobsonManaging DirectorRichard L. GrubmanManaging DirectorCircuit City's domestic segment operates 630 superstores and five mall-based stores in 160 U.S. markets and its international segment operates through more than 1,000 retail stores and dealer outlets in Canada.Visit Circuit City Stores Inc.: www.circuitcity.com"