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Blockbuster Bankruptcy Rumor Resurfaces

11 Jun, 2010 By: Erik Gruenwedel

Fiscally challenged Blockbuster Inc. is in talks with its bondholders to get $150 million “debtor-in-possession” funding should it enter into Chapter 11 bankruptcy protection, according to a new Wall Street Journal report.

Though considered more a precautionary measure than an actual move toward financial reorganization, the action underscores the financial straits Dallas-based Blockbuster finds itself heading into for the June 24 annual shareholder meeting.

Blockbuster has been in ongoing discussions with bondholders, attempting to substantially decrease more than $900 million in debt in order to focus on implementing a new multiplatform distribution strategy. The negotiations prompted Blockbuster to push back the shareholder meeting from May as senior management, including CFO Thomas Casey and CEO Jim Keyes, iron out an agreement. 

“This is as normal as looking for an apartment when you risk losing your house to foreclosure,” said Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles. “It doesn't guarantee you may [foreclose], but you wouldn't be doing it unless you think you may need it.”

In a June 11 proxy filing to shareholders, Blockbuster, in Power Point detail, reiterated its industry-exclusive multitier approach to entice rental consumers, featuring video-on-demand (VOD), mobile phone, traditional store, by-mail and kiosk — the latter two not affected by 28-day delays of new releases imposed upon Redbox and Netflix by select studios.

Indeed, Blockbuster said it could increase revenue 30% if only 6% of the current kiosk and by-mail subscription business shifted its way. Blockbuster said it expects to generate $50 million in gross profit from subscriptions this year.

The company said that just 7% (463) of total stores were unprofitable as of Jan. 3, with 1,151 stores generating 60% in pre-tax earnings (EBITDA) and another 1,456 stores generating 27% EBITDA.

Blockbuster believes its surviving stores will play a key role implementing a so-called “automated retail” supply chain providing more efficient replenishment of stock to kiosks and by-mail consumers.

“Stores can maintain supplies to automated retail-ready rentals without additional shipping time delays,” Blockbuster wrote.

Blockbuster also continued to hammer away at the qualifications and credibility of dissident shareholder Gregory Meyer, who is attempting to wrest control of a board seat. Meyer owns more than 600,000 shares of Blockbuster common stock and founded kiosk vendor DVDXpress, which he later sold to Coinstar.

“We have heard rumors that Coinstar is looking to jettison Meyer’s former business [DVDExpress], which does not seem to be a ringing endorsement of his abilities and strategies,” Blockbuster wrote in the proxy.

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