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Report: Icahn Acquires a Third of Blockbuster’s Debt, Could Affect Bankruptcy Filing

17 Sep, 2010 By: Erik Gruenwedel

In a twist, corporate raider Carl Icahn has reportedly informed Blockbuster Inc. that he purchased about a third of the DVD rental icon’s debt and is in a position to impact ongoing fiscal restructuring, including possibly bankruptcy.

Dallas-based Blockbuster, which has been struggling to recapitalize and restructure more than $900 million in bond debt, last month indicated it was working on a pre-planned bankruptcy that could occur as early as today.

First reported late Sept. 16 by Bloomberg News, Icahn informed Blockbuster officials that he owned enough of the debt to impact negotiations — including third-party funding for control of the company — and would do so, according The Wall Street Journal, which cited a source familiar with the restructuring.

Blockbuster, which last week parted ways with its CFO, has been attempting to reduce or eliminate about $630 million of its senior secured debt. The company has twice postponed a $42.7 million interest payment on the debt, including most recently until Sept. 30.

Regardless of its fiscal outlook, Blockbuster remains a strong brand in home entertainment. The company has aggressively sought to roll out a multiplatform distribution model that includes by-mail, kiosks, VOD, mobile and a smaller-sized retail stores.

Icahn, who held a seat on Blockbuster's board before resigning earlier this year, is infamous for acquiring stakes in distressed or underperforming companies and then exerting pressure on boards and management under the guise of protecting shareholder value. Icahn has also sold most of his Blockbuster shares for pennies on the dollar.

Indeed, the investor is currently engaged in an ongoing battle with senior management of Lionsgate for control of the Santa Monica, Calif.-based mini-major.

Michael Pachter, analsyt with Wedbush Morgan Securities in Los Angeles, said Icahn's reinvolvement in Blockbuster could stabilize the company's pre-tax earnings and cash flow. He believes a probable bankruptcy could free up from $20 million to $30 million in re-negotiated store leases, and generate an additional $100 million in revenue due to the departure of Movie Gallery and Hollywood Video.

"Icahn probably figures that it’s a good gamble to buy bonds and get $30 million or more annually for a few years," Pachter said. "He clearly sees value there. I'm not sure what he paid for the bonds, but I assume that his projected recurring cash flow for the company gives him a decent return. Either that, or he’s a glutton for punishment."


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