On the heels of securing changes to the board, Circuit City Stores Inc.'s (CC) third-largest shareholder on Friday expressed confidence that other parties will join Blockbuster Inc. (BBI) in pursuing the consumer-electronics retailer.

"I'm very familiar with what's going on, and I'm quite confident you will see other interested parties," said Mark Wattles, principal of Wattles Capital Management LLC, in an interview.

"The board - particularly the lead director - and the bankers convinced me that they were serious and they convinced me through their actions, so this is a very real process taking place with a world-class bank leading it, and it's a process that's independent from management," he said.

Circuit City earlier Friday announced Wattles Capital, which owns a 6.5% stake, had dropped its proxy contest to win five seats on the board after the retailer agreed to nominate three of the firm's choices. The Richmond, Va., retailer also said it had hired Goldman Sachs to explore strategic options, including Blockbuster's more than $1 billion unsolicited proposal.

Blockbuster said in April it was confident it could pay between $6 and $8 a share, subject to due diligence, but Wattles expects financial buyers to join the process and push the price higher.

"This process is real," Wattles said.

He dismissed outsiders' views that a combination of Blockbuster and Circuit City doesn't make sense.

"They don't have to understand," he said.

In addition to Wattles, Circuit City's largest shareholder, HBK Investments LP, has urged the retailer to explore a possible deal with Blockbuster, Wattles noted. HBK Investments also beneficially owns about 8% of Blockbuster's Class A stock and about 5% of Class B stock.

"It's really irrelevant what consultants or analysts think or (what) they want to see done," he said. "What's very clear is Carl Icahn and (Blockbuster Chairman and Chief Executive) Jim (Keyes) have a clear vision for the company and are very enthusiastic about this transaction."

Blockbuster's biggest shareholder, activist Carl Icahn, has said he would finance the deal if necessary. He owns 16% of Blockbuster's Class A stock and 7.7% of Class B shares. He couldn't be reached immediately for comment Friday.

Wattles declined to speculate on potential bidders but said financial firms would most likely be interested. "This is a very unique transaction in that it can be financed using existing assets as opposed to cash flow," he said. " Circuit City has $1.5 billion in inventory with virtually no debt against it, and you could borrow over $1 billion against that alone." Other favorable financing factors include tax credits, proceeds from a potential sale of Circuit City's Canadian operations and cash, he said.

Meanwhile, returning Circuit City's Ebitda, or earnings before interest, taxes, depreciation and amortization, to the roughly $400 million in recent years would yield a value topping $2 billion at a deal multiple of sic times, he said. "I think you'll see several other buyers."

Shares of Circuit City recently traded up 9.2% at $5.23, while Blockbuster was down 2.7% at $2.13.

-By Mary Ellen Lloyd, Dow Jones Newswires, 704-371-4033; maryellen.lloyd@ dowjones.com

  (END) Dow Jones Newswires
  05-09-08 1501ET
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