May 9 (Bloomberg) -- Circuit City Stores Inc., pressured by investor Mark Wattles to raise its stock price, put itself up for sale and opened its books to Blockbuster Inc. and billionaire Carl Icahn to prepare for a possible offer.

The second-largest U.S. electronics retailer rose 5.8 percent in New York trading.

Blockbuster made an unsolicited bid of $6 to $8 a share for Circuit City in February, provided it could study the retailer's books. That would value Circuit City at $1.35 billion, more than 50 percent higher than its market capitalization now. Icahn said today he'd purchase the company should Blockbuster fail to get financing. Circuit City hired Goldman, Sachs & Co. to review its options.

``This is a significant development and makes it more likely that a deal will happen,'' Richard Hastings, an analyst with the Federation of Credit and Financial Professionals in South Plainfield, New Jersey, said in an interview.

Circuit City, which lost money in the past two years as Best Buy Co. and Wal-Mart Stores Inc. lured customers away, has opened smaller stores and fired higher-paid employees to lower costs. Wattles, who owns 6.5 percent of the retailer, had sought to replace Chief Executive Officer Phil Schoonover and gain five seats on the board, arguing that management's strategy isn't working.

Wattles and Circuit City have agreed to include three of his nominees as part of a slate of directors to be elected at this year's annual meeting, the retailer said in a separate statement.

Circuit City, based in Richmond, Virginia, climbed 28 cents to $5.07 at 4 p.m. in New York Stock Exchange composite trading. Blockbuster fell 2 cents to $2.66.

Blockbuster `Pleased'

Blockbuster said in a separate statement that it was ``pleased'' with the decision. The world's largest movie-rental chain, which also lost money last year, has said it would combine electronics with movies and eliminate overlapping store locations.

Circuit City is trading 16 percent below the low end of the preliminary bid. It once rose as high as $31.54 and has lost 85 percent of its market value since May 2006.

``Consumer-electronics is littered with the corpses of investors who thought they could make it in this competitive industry,'' said Richard Weinhart, an analyst with BMO Capital Markets in an interview. ``Combining two struggling retailers isn't likely to produce winning results.''

Blockbuster, with $703 million in long-term debt among its liabilities, has a total debt-to-asset ratio of 28 percent. It's seeking to buy a company with almost twice its $477.9 million market value.

Circuit City

Circuit City is worth $855.8 million and has a ratio of 1.83 percent. The ratio shows how much of a company's assets are financed by short- and long-term debt.

Blockbuster and Icahn won't find anything they don't already know when they look through Circuit City's books, Wattles said in an interview on Bloomberg Television.

``The due diligence here will be more confirmatory than discovery due diligence,'' he said.

Wattles, 47, founded the Hollywood Video chain and sold it in 2005. He bought retailer Ultimate Electronics Inc. at a bankruptcy auction that year.

He expects to get more for Circuit City than the $8 a share at most offered by Blockbuster, he said. The financial markets are more willing to lend money when assets and inventory are held against the loan, he said.

``That market is good and healthy,'' he said. ``Financing won't be the issue here.''

GE Capital Assessment

Wattles said he has spoken to GE Capital about what they might loan against Circuit City's inventory.

``You could borrow over $1 billion against the inventory that exists at Circuit City,'' he said. ``And there's no debt against it.''

Ned Reynolds, a spokesman for GE Commercial Finance, said the company doesn't comment on ``speculative stories.''

Buyers will be interested in turning the company around, Wattles said. Circuit City could be worth $2.5 billion to $3 billion, he said.

``I think Blockbuster can pull this off,'' Wattles said. ``I'm a fan of the two companies coming together. The real issue is who the other potential buyers are. I think there's just as great a likelihood, even a greater likelihood, that it's not Blockbuster that ends up buying Circuit City.''

Icahn, who owns 16 percent of Blockbuster, first began purchasing its shares in 2004. He began a proxy fight in 2005 that led to the appointment of himself and two of his nominees to the chain's board. Blockbuster has dropped 72 percent since the end of 2004.

Icahn's Strategy

``I don't know what Icahn's doing here,'' said John Orrico, a manager of the $200 million Arbitrage Fund, which invests in takeover targets. ``Throwing good money after bad is the way we view this strategy. We don't see this transaction being a smart move for either party.''

Icahn didn't respond to a message left with his assistant Susan Gordon.

Circuit City sought a letter from Icahn guaranteeing that he would acquire the electronics retailer should a review of its financial information be deemed satisfactory and Blockbuster be unable to complete its offer, Icahn said today in a regulatory filing.

If a public statement to that effect weren't made, Circuit City wouldn't allow Blockbuster to review its books, Icahn said.

Icahn, 72, tends to buy into struggling companies and push for change. He is seeking his own nominees on the board of Biogen Idec Inc., the world's biggest maker of multiple sclerosis drugs, so they can push for a sale of the company.

Motorola Inc., the third-biggest maker of mobile phones, plans to split into two companies next year following pressure from Icahn.

To contact the reporter on this story: Carol Wolf in Cleveland at cwolf@bloomberg.net.

Last Updated: May 9, 2008 18:32 EDT