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Blockbuster Cuts Viacom Risk, Shares Soar

2 Sep, 2009 By: Erik Gruenwedel

Blockbuster Inc. Sept. 2 took a significant step in correcting its perceived credit crisis when it abridged the value of letters of credit for former parent Viacom Inc. to $25 million from $75 million.

The news sent Blockbuster shares up more than 30% to $1.20 per share in midday trading.

Viacom, which spun off Blockbuster in 2004, saddling the Dallas-based No. 1 DVD rental service with nearly $750 million in debt, had maintained the letters of credit to protect itself against possible liability regarding Blockbuster store leases dating back to 1999. Blockbuster, in reducing the credit amount, said the majority of leases in question had been renewed or renegotiated. The company spends about $400 million annually on lease agreements.

“We are pleased to have reached this agreement with Viacom, which delivers on our promise to improve liquidity through a number of initiatives,” said Jim Keyes, chairman and CEO of Blockbuster.

The move comes after Blockbuster Aug. 28 said it had sold the 186-store Irish retail unit Xtra-Vision Ltd. for $45 million in cash to an Irish investment firm in an effort to improve liquidity.

Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles, said the sale of Xtra-Vision would likely cut $35 million from Blockbuster’s annual $200 million in sales, general and administrative (SG&A) costs based on an estimated $200,000 in SGA expense per store.

“The $45 million, which is 30% of Blockbuster’s targeted free cash flow, will help offset a probable loss of $15 million in estimated EBITDA that it loses from the sales of the business,” Woo said.

In a separate research note, Deutsche Bank analyst Karru Martinson said the reduced liability amounted to another positive step for the beleaguered Blockbuster brand.

"The reduction is greater than the $25 million target the company had earlier highlighted and will further improve liquidity," Martinson said.

Earlier this year, Blockbuster completed funding of a revised $250 million credit facility.

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