By Erik Gruenwedel | Posted: 03 Mar 2009
Blockbuster is not planning to file for Chapter 11 bankruptcy protection, despite hiring a legal firm that specializes in corporate fiscal restructuring, according to spokesperson Karen Raskopf.
The Dallas-based No. 1 DVD rental firm March 3 retained Kirkland & Ellis LLP, a firm that specializes in bankruptcy, including so-called “pre-packaged” or “pre-arranged” financial reorganizations.
A pre-packaged filing typically includes agreements from creditors about the outcome of the company’s reorganization.
Raskopf said Kirkland & Ellis was retained for assistance in ongoing financing and capital fundraising initiatives to replace a $200 million credit revolver that matures (comes due) in August.
“We are pursuing financing options and we hired Kirkland for that effort,” Raskopf said. “We do not intend to file for bankruptcy.”
She said it was the normal course of business to hire lawyers, bankers and financial advisors when exploring different options.
Raskopf agreed that generating a substantial line of credit in the current economy was challenging. She said Blockbuster had a fallback option that included self-financing backed by the company’s considerable cash flow. This option would enable Blockbuster to sustain operations through the end of the year.
“We are hopeful that won’t be necessary,” Raskopf said.
She said she understood why the media jumped on the bankruptcy angle, considering Kirkland’s expertise in the matter.
“They are also known for helping people with their capital raising initiatives,” Raskopf said. “That’s why we’ve hired them.”
Blockbuster was saddled with more than $1 billion in debt folowing its spinoff from Viacom in 2004. It had whittled down long-term debt to about $600 million with $95 million in available free cash, according to a recent regulatory filing.
Edward Woo, research analyst with Wedbush Morgan Securities in Los Angles, who tracks Blockbuster, said a bankruptcy filing underscored the current economic times.
“They wouldn't hire a lawyer unless they think they will use it,” Woo said.
He said Blockbuster, like many retailers, has historically faced liquidity issues, a situation exasperated by the current economy. Woo said studios and video game publishers should be concerned since he estimated Blockbuster spent about $2.7 billion on games and DVDs in 2007.
Wall Street reacted accordingly, sending Blockbuster shares freefalling more than 77% to 22 cents per share in midday trading before trading was halted. Shares of rival Netflix closed up nearly 6%.