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Obstacles Emerge in Blockbuster, Bondholders Discussions

26 May, 2010 By: Erik Gruenwedel

Negotiations between Blockbuster and its largest creditors reportedly hit a snag regarding revised equity stakes and the amount of additional capital bondholders would put into the Dallas-based DVD rental giant, among other issues, according to a Wall Street Journal report.

With more than $900 million in debt (the majority accrued following payment of a handsome dividend to former parent Viacom), Blockbuster has been hamstrung in efforts to rollout a multiplatform distribution strategy — requisite to survival in a rapidly evolving home entertainment market.

Citing sources familiar with the talks, the WSJ reported that one group of creditors owed about $300 million wanted a “lions share” equity stake in the restructured company and was willing to pump in only another $30 million into Blockbuster — $70 million less than what the company needs.

Another group of bondholders owed more than $600 million also wants a majority stake in the new company in exchange for excusing the debt, according to the report.

Blockbuster management has pinned significant hopes on the discussions — even delaying its annual shareholders meeting a month in order to iron out an agreement. A positive outcome to the talks is paramount to Blockbuster’s survival, with ongoing efforts at reducing sales, general and administrative (SG&A) expenses and shuttering underperforming stores seen as secondary in importance, according to some analysts.

“The amount of the debt is a big weight on the company, which they need to remove if they are going to be a viable business going forward,” said Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles.

Woo said Blockbuster’s current business structure — at a time when kiosk rentals and Netflix have gobbled up market share — cannot service interest and principal payments coming due later this year.

Indeed, Blockbuster faces $150 million in debt and principal payments this year and had 146 million available in cash at the end of the first quarter.

“They will either have to improve their business (which is a big challenge) or significantly reduce their interest and principal payments,” Woo said.

Blockbuster shareholders took the hint, sending shares down nearly 20% to close May 26 at 28 cents per share in heavy (10.5 millions shares) trading.

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