Remember that crazy $1 billion offer for Circuit City Stores from Blockbuster? Maybe it's not so crazy after all.

Circuit City has essentially put itself up for sale, announcing that it has retained Goldman Sachs to advise it on "exploring strategic alternatives."

And after publicly scoffing at Blockuster's ability to finance a $1 billion offer, the electronics retailer now says that it will allow Blockbuster and Carl Icahn, who owns more than 10 percent of Blockbuster, to conduct additional due diligence.

Circuit City, however, emphasized in its statement that it has not decided on a course of action.

"Let me be clear that our decision to allow Blockbuster and Carl Icahn to conduct due diligence should not be taken as an indication that the board has completed its review of the Blockbuster proposal, that the board has taken a position on the company's value, or that it has settled upon a particular strategic course of action," said Philip Schoonover, chief executive of Circuit City.

But changes are clearly on their way at Circuit City. The company also announced that it had reached an agreement with activist investor Mark Wattles. Circuit City will support three of Wattles Capital Management's nominees to its board in exchange for Wattles dropping his proxy challenge.

Wattles, the former chief executive of another video-rental chain, Hollywood Entertainment, owns 6.5 percent of Circuit City. As Megan Barnett reported last month, Wattles has had friendly discussions with Icahn in the past and could push Circuit City to support a deal.

So why the change of heart at Circuit City?

The company cites a letter from Icahn, saying that he stands ready to buy the company if Blockbuster cannot come up with the financing.

The New York Times' DealBook blog notes how this development illustrates that in "these tight credit markets, having a deep-pocketed partner—such as Mr. Icahn, or, in the case of Mars' deal to buy Wm. Wrigley Jr. Company, Warren Buffett—is a valuable asset in attempting a large takeover."

Blockbuster has had success in fending off NetFlix, but it faces an uncertain future when downloading movies becomes more common. Circuit City has been bruised and bloodied in competition with Best Buy and Wal-Mart.

The strategic logic of combining the two is still baffling. Blockbuster has yet to lay out an articulate argument on why a deal makes sense. In responding to the Circuit City announcement, Blockbuster continues to employ corporate P.R. mumbo jumbo.

Blockbuster said in its statement: "We are pleased to have reached an agreement with Circuit City to conduct due diligence and further explore a possible merger between our two companies. We continue to believe this combination would create significant cost and operating synergies, therefore unlocking substantial value for our shareholders."