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Analysts Ponder Blockbuster Survival

10 Mar, 2009 By: Erik Gruenwedel


Analysts continue to worry whether Blockbuster can bounce back from the March 3 bankruptcy false alarm that sent the Dallas-based No. 1 DVD rental company’s stock freefalling.

When Blockbuster announced it had retained Kirkland & Ellis LLP, a firm that specializes in bankruptcy, including so-called “pre-packaged” or “pre-arranged” financial reorganizations, speculation it would file for Chapter 11 protection skyrocketed.

Blockbuster spokesperson Karen Raskopf denied a bankruptcy filing was in the works and said the law firm had been hired to help secure additional funding.

Regardless, the company lost nearly $100 million in market capitalization as share prices plunged well below the current 41-cent per share valuation.

At issue: concerns whether Blockbuster can refinance long-term debt obligations that come due this year, including a $200 million credit revolver that matures in August.

“Bankruptcy wipes out shareholders and a 40-cent share price tells you people are fearful,” said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, who tracks Blockbuster. “They have to show us a path for debt repayment or refinancing.”

Fellow analyst Edward Woo said the company had to continue generating enough revenue to pay down debt. Indeed, Blockbuster issued a report stating that domestic same-store sales were up 4.4% in the fourth quarter ended Jan. 4.

“I doubt next week's financials will be enough,” Woo said. “I think investors really want to make sure their debt is going to be OK.”

Luke Shagets, research associate with Sterne Agee in Dallas, said Blockbuster shares had stopped trading on business fundamentals and more as a reaction to credit worries.

Independent analyst Rob Enderle, a strong supporter of digital distribution of entertainment, said with studios looking for alternative channels to move content and generate incremental revenue, Blockbuster increasingly looks anachronistic.    

“For Blockbuster to recover, they need to again look like they are leading the market as opposed being pounded terminally by it,” Enderle said. “While always possible, right now, it currently appears unlikely.”  

Blockbuster reports results March 19. 

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