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Blockbuster Bankruptcy Imminent, Analysts Say

9 Aug, 2010 By: Erik Gruenwedel

Fiscally challenged Blockbuster this week is expected to announce the extension of a forbearance agreement with select creditors as it prepares a pre-packaged bankruptcy filing that could occur within a month, analysts said.

Dallas-based Blockbuster, which is struggling with cash-flow and major debt issues ($980 million), is attempting to recapitalize as it rolls out a multiplatform distribution strategy delivering movies by mail, kiosk, transactional video-on-demand (VOD), mobile phone and with fewer traditional store locations.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said it is likely the current forbearance agreement, which expires Aug. 13, will be extended long enough to allow bankruptcy proceedings to commence when Blockbuster reports second-quarter (ended July 4) results after the market close Aug. 12.

“As such, it is not clear whether common shareholders will be protected,” Pachter wrote in an Aug. 9 note.

After being delisted July 1 by the New York Stock Exchange, Blockbuster said it had entered into a forbearance agreement with creditors to avoid paying a $42 million interest payment.

Opting for pre-packaged bankruptcy requires all creditors agreeing in advance on a series of issues that are mutually beneficial and least disruptive to the business — no simple task, considering the struggles Blockbuster has encountered recapitalizing. To accomplish a pre-bankruptcy filing would require, at the least, extending the forebearance.

“If they would have been able to avoid bankruptcy, it’s likely they would have been able to come to a recapitalization already,” said Wedbush colleague Edward Wood.

Pachter said the forbearance keeps unsecured creditors from claiming cross default and compelling a Chapter 7 bankruptcy filing. Cross defaults are provisions in which a borrower with multiple debt obligations defaults on one of the debts, triggering an automatic default on all other debts held by the same lender.

The analyst believes Blockbuster will recapitalize by mid-September and could even avoid bankruptcy if all goes to plan.

Indeed, during the quarter, 28-day delays of select new releases to Netflix and Redbox, coupled with the shuttering of Movie Gallery and Hollywood Video stores, may have actually improved Blockbuster’s cash flow despite a challenged future, Pachter said.

“Most consumers are motivated by price, are generally unaware of a DVD’s street date, and are likely to discover availability when visiting their local Redbox kiosk, rendering the 28-day head start inconsequential over the long run,” Pachter wrote. “Market share losses appear to be accelerating at a faster rate than Blockbuster can diversify its revenue sources, and any benefit from the 28-day window or from Movie Gallery closings is likely temporary.”

Blockbuster is projected to report a (24 cents to 28 cents-per-share) loss on revenue from $808 million to $840 million.

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