Believing in Blockbuster

Some folks go for tattoos, piercings, or eclectic haircuts to stand out from the crowd. I can do it in just four words: I believe in Blockbuster (NYSE: BBI).

I'm not a zealot. In fact, I don't even necessarily think Blockbuster will be around in five years. I'm just an opportunistic believer. I think, as a near-term investment, that Blockbuster is an intriguing gamble with attractive odds.

Yes, the company is in a financial bind. Yes, the company's losing the mailbox battle to Netflix (Nasdaq: NFLX), the instant-gratification battle to pay-per-view cable giants, and the digital-delivery battle to Amazon.com (Nasdaq: AMZN). But why is no one rallying around the company's gains in retail? More importantly, why is everyone doubled over laughing now that Circuit City (NYSE: CC) is willing to open its books to Blockbuster, with the possibility of smoking out a buyout?

Read 'em and weep
Circuit City's stock shot up on Friday, when the consumer-electronics superstore chain agreed to let Blockbuster -- and Blockbuster shareholder Carl Icahn -- complete the due diligence required in forming a bid. Blockbuster and Icahn apparently were able to convince Circuit City that they have the ability to bankroll this deal -- or at least that Icahn may take it on as his own turnaround pet project, if Blockbuster bows out.

Blockbuster has said it would be willing to buy the company for at least $6 a share but that it would need to sift through Circuit City's books before making a specific buyout bid. It now has that chance.

The gain in Circuit City's stock on Friday accompanied a dip in Blockbuster's shares. In other words, the market thinks Blockbuster will be getting a bad deal if it stacks Circuit City's problems on top of its own.

I don't see it that way at all. I realize I'm in the minority here, but I think that Blockbuster's best strategy is to get deeper into physical retail. DVD rental is a fading industry. Consumer-electronics and gadgetry sales aren't. Circuit City is the ideal target, because it's a big brand that can be had at a fraction of the price of market leader Best Buy (NYSE: BBY).

When Jim Keyes came over to run Blockbuster last year, he was charged with breathing new life into the tired rental franchise. He managed to do just that at the helm of 7-Eleven. In Blockbuster, where we're seeing ramped-up merchandising efforts and video-gaming initiatives, Keyes has a company that may be reaching the point of treating Hollywood flicks as a loss leader to get patrons into the store. After all, if a supermarket chain can take a hit on milk, knowing that it will more than make up the difference through incremental purchases, why not Blockbuster?

Addition through multiplication
Will Blockbuster become more like Circuit City? Will Circuit City become more like Blockbuster? Let's hope for both. Do you think Blockbuster would be in a funk if it were selling big-ticket items the way Circuit City does? And do you think Circuit City would be in a world of hurt if it had the flow of regulars that Blockbuster's model relies on?

The pieces fit, as long as the combination of the two companies doesn't create a balance sheet so leveraged that the new company will have a timer counting down the seconds until patience expires.

I also think Blockbuster should not be discouraged if Circuit City's books present more red flags than a Cold War-era Soviet parade. If that happens, Blockbuster should just move on and see whether small-box gadgetry hub RadioShack (NYSE: RSH) or the more media-savvy Hastings Entertainment (Nasdaq: HAST) is available.

There's no point in trying to compete against Web-sharp players such as Amazon or Netflix in cyberspace. It has to go back to go forward. If that doesn't work, there's always the shelves of Back to the Future rentals.