April 14 (Bloomberg) -- Blockbuster Inc., the movie-rental chain that's lost half its market value in a year, made an unsolicited $1.35 billion offer for Circuit City Stores Inc., the money-losing consumer-electronics chain.

Blockbuster, based in Dallas, bid between $6 and $8 a share in a February letter to Circuit City Chief Executive Officer Philip Schoonover, as much as double last week's closing price. Circuit City, which rose the most in at least 28 years in New York trading, said in a statement it isn't convinced Blockbuster can finance a purchase.

The Blockbuster bid is backed by director Carl Icahn, who controls about 16 percent of the chain's Class A shares, according to Circuit City investor Mark Wattles. Wattles has been seeking Schoonover's ouster and a buyer for the retailer. The company posted five quarterly losses before returning to profit, and forecast a pretax loss for the coming year. Blockbuster's offering price is double its own market value.

``There are no historical examples of success of a company that does one thing trying to acquire infrastructure to do something different,'' Colin McGranahan, an analyst with Sanford C. Bernstein & Co., said in an interview.

Circuit City, whose sales declined every quarter last year, soared $1.07, or 27 percent, to $4.97 at 4:01 p.m. in New York Stock Exchange composite trading. The shares tumbled 79 percent in the 12 months through last week. Blockbuster declined 32 cents, or 10 percent, to $2.81, the biggest decrease since January.

Blockbuster CEO Jim Keyes said a merger would save money and combine experience in video distribution with the sale of electronic devices. A message left at Icahn's office wasn't returned.

Financing Questioned

``To date, Blockbuster has been unable to satisfy Circuit City and its advisers that Blockbuster's proposal could be financed,'' Circuit City said in the statement. Goldman, Sachs & Co. is giving Circuit City financial advice. The chain's legal counsel is Wachtell, Lipton, Rosen & Katz.

Executives at Blockbuster, which has a market value of $519 million, declined to specify on a conference call how they would pay for the bid until they got a closer look at Circuit City's books. Circuit City said it won't allow Blockbuster access to its financials until the video chain shows it can fund the purchase.

``Is Carl Icahn going to put the up the cash to do this deal?'' said McGranahan. ``Otherwise, it doesn't look like it's fundable.'' He has a neutral rating on Circuit City.

Icahn's Support

Wattles said in an interview today that Icahn told him he was prepared to support a share offering by Blockbuster by absorbing any stock investors didn't buy.

``Now you're looking at an offer that would be at minimum $6 and could be $8,'' Wattles said. ``That's a pretty significant premium. I view it as a very favorable transaction for shareholders relative to other opportunities.''

Blockbuster's Keyes said he wants to keep any transaction on ``friendly terms,'' as did investor Wattles.

``I'm quite anxious for this turn into a cooperative process, as opposed to a hostile process,'' Wattles said in a Bloomberg Television interview. ``Although I'm prepared to support either one.''

Circuit City has 693 stores in the U.S. and 779 shops and dealer outlets in Canada. Combined, the chains would have more than 9,300 stores worldwide.

Keyes said today the acquisition would give Circuit City more than 4,800 additional U.S. stores and movie and video-game rentals, helping to differentiate it from Wal-Mart Stores Inc. and Best Buy Co.

More Devices

It also would give Blockbuster the chance to offer its movie-rental plans to Circuit City shoppers, offer Circuit City's technical support at Blockbuster stores, and sell more portable video devices, he said.

``We sell razor blades today, but we don't sell you the razor,'' Keyes said on the media conference call.

Schoonover has opened stores that are about one-third smaller than its average location and reduced staff as same- store sales declined and it lost clients to Best Buy, the biggest electronics chain. Revenue and earnings are suffering because new employees are struggling to sell service packages and warranties, among the most profitable items electronics retailers offer.

Before 2007, Blockbuster lost money in nine of the past 10 years as people switched to mail-order movie rentals. Blockbuster is cutting marketing costs and shedding unprofitable customers to return to profit. It also sold more DVDs and raised prices on its Total Access online plan, designed to compete with Netflix Inc. in rentals by mail.

`Improved Results'

``At Blockbuster, we have successfully deployed a series of strategic initiatives designed to provide our customers with convenient access to media content,'' Keyes said in the statement. ``These strategic initiatives have already improved our financial results.''

Blockbuster also forecast today net income of $30 million in the first quarter. That compares with a $49 million loss in the same period last year.

The video-rental chain said it made the proposal public because it ``believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company. As Blockbuster has other strategic opportunities, its offer is conditioned upon timely commencement of the due diligence process.''

Keyes said he hasn't yet spoken with Wattles.

Wattles, who holds a 6.5 percent stake in Circuit City, met with the electronics retailer's lead director, Mikael Salovaara, on April 11 to discuss the makeup of the board. Wattles founded the Hollywood Video chain and sold it in 2005. He bought retailer Ultimate Electronics Inc. at a bankruptcy auction that year.

To contact the reporter on this story: Loveday Morris in London at lmorris7@bloomberg.net; Mark Clothier in Atlanta at mclothier@bloomberg.net

Last Updated: April 14, 2008 17:52 EDT