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Blockbuster Shares Hit Record Low

14 Jun, 2010 By: Erik Gruenwedel

Blockbuster Inc. shares fell more than 21% June 14 following a June 11 media report that claimed the Dallas-based DVD rental giant was seeking a type of funding typically used during a bankruptcy, among other fiscal options.

Blockbuster, with more than 3,000 stores, remains the only nationwide chain renting and selling DVD and Blu-ray Disc movies and video games. Movie Gallery and Hollywood Video ceased operations last month.

With a shareholder meeting slated for June 24, the company has outlined a strategic plan that puts its profitable stores at the center of a multiplatform distribution channel incorporating renting movies by-mail, Blockbuster Express kiosks, Blockbuster Mobile and Blockbuster On Demand downloads.

The Wall Street Journal reported Blockbuster officials are seeking $150 million in “debtor-in-possession” funding from bondholders. They also are in advanced talks with the same creditors holding more than $900 million in debt — seen by many as the crux to Blockbuster’s inability to turn the corner financially.

Ironically, if Blockbuster has any leverage, it is that $900 million, which could evaporate along with shareholder equity should it declare Chapter 11. As a result, conventional wisdom suggests creditors would be inclined to forgive much of the debt in turn for a greater stake in Blockbuster.

The company also has requested additional funding to go along with an increased ownership stake — the amount of which reportedly remains a stumbling block.

Regardless, Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles and longtime Blockbuster observer, said that with pre-tax earnings falling below its interest payments, pulling the trigger on complete fiscal restructuring appears a formality.

“It's really just a question of when the creditors force a bankruptcy,” Pachter said, adding he believes that will happen before the end of the year.

Blockbuster shares closed at a record low 21 cents per share.

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