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News Analysis: Wall Street Kicking Blockbuster

23 Mar, 2009 By: Erik Gruenwedel


On a day the Dow Jones soared nearly 500 points, shares of the Dallas-based No. 1 DVD rental service March 23 fell about 11% as investors continued to question whether Blockbuster Inc. can survive the current economic tsunami.

Generating about $1.4 billion in revenue in 90 days apparently doesn’t carry much clout anymore — especially if you are considered a 1980s retail icon seen by some as past its prime.

While investors cite the usual suspects — declining DVD sales and the emergence of digital streaming — a growing chorus of concern emerged of late when scuttlebutt suggested Blockbuster would struggle to pay off a $200 million maturing credit revolver and/or find a replacement source of funds.

Edward Woo, analyst with Wedbush Morgan Securities, which covers Blockbuster, said the market’s attitude toward Blockbuster didn’t appear to emulate the optimism surrounding March 23 reports of positive home sales and the Treasury Department’s banking plans.

In last week’s financial call, CEO Jim Keyes appeared to underscore those concerns when he said Blockbuster’s ambitious transformation from rental pure play to all-in-one entertainment retailer would have to be borne more on the backs of third-party partners than internal financing.

When the company announced it had secured through 2010 an amended revolver with J.P. Morgan and others, Pali Capital analyst Stacey Widlitz estimated Blockbuster had now saddled itself with $305 million in debt obligations in 2010, with monthly revolver payments starting in January 2010.

Indeed, the interest rate on the new revolver is below previous estimates, but a monthly payment of $25 million is due in December this year, followed by $20 million payments January to March, $10 million in April, $15 million in May, and $10 million in July and August.

They all pale in comparison to the $50 million payment due in June 2010, according to a regulatory filing.

“The terms of the agreement put [Blockbuster] on a short leash in terms of running the business,” Widlitz said in a note.

What appeared lost in the rush to scrutinize the new funding was that Blockbuster actually reported $80 million in profit in the most recent quarter, after eliminating the $435 million write-down of “impairment goodwill and other long-lived assets.” It also generated more than $152 million in operating cash flow, compared with a $56 million cash burn during the same period a year ago.

Wedbush analyst Michael Pachter admitted the terms of the new line of credit were “pretty tough,” but he said people were jumping to the conclusion Blockbuster is desperate.

“They're not, and they are trying to get this out of the way to move on,” he said. “They will access the [revolver] only as a backstop … but the market doesn't like it.”

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