Blockbuster Files for Bankruptcy Protection

23 Sep, 2010 By: Erik Gruenwedel

As expected, Blockbuster Inc. Sept. 23 filed a pre-packaged bankruptcy in U.S. Bankruptcy Court in New York, and initiated a $125 million debtor-in-possession financing loan provided by senior bondholders to maintain operations.

Under the recapitalization plan, Dallas-based Blockbuster reduced more $1 billion in debt to about $100 million, according to the filing. Blockbuster's largest studio creditors include 20th Century Fox Home Entertainment with $21.6 million in claims.

Under the proposed plan, Blockbuster's 11.75% senior secured notes will be exchanged for equity in the reorganized company. The only debt expected to remain upon emergence from Chapter 11 will be the amounts drawn under the $125 million DIP financing, which will convert to an exit loan facility of up to $50 million.

Holders of Blockbuster’s outstanding subordinated debt, preferred stock or common stock, will get nothing.

“After a careful and thorough analysis, we determined that the process announced today provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future as we continue to transform our business model to meet the evolving preferences of our customers,” said CEO Jim Keyes in a statement.

Keyes said Blockbuster’s 3,000 domestic stores would remain open during bankruptcy while it evaluates its store base, including reportedly shuttering hundreds of company-owned locations.

Blockbuster is expected to focus on a multiplatform distribution strategy that includes Blockbuster Express kiosks, Blockbuster On Demand, Blockbuster Mobile and a smaller retail footprint.

Duluth, Ga.-based NCR Corp., which has rolled out 7,000 Express kiosks under a license agreement with Blockbuster, reaffirmed support for the company and continued involvement with Blockbuster Express.

“Our relationship with Blockbuster continues and we welcome their 'business as usual' approach in creating demand for convenient access to entertainment,” said Justin Hotard, VP and GM of NCR Entertainment.

Simon Swart, EVP and GM of 20th Century Fox Home Entertainment, said the studio would continue to support Blockbuster, which he described as a mutually beneficial and profitable partner.

“We are confident that Blockbuster will emerge from its reorganization financially healthier and able to innovate to serve the entertainment needs of its huge customer base,” Swart said in a statement.

Niko Celentano, who headed a Blockbuster shareholder group, said the filing was "a sad day" for shareholders. He faulted Keyes and the Blockbuster board for allowing the rental icon's fortunes to decline.

"Jim Keyes is the main reason Blockbuster is in this position today, due to his denial of being in a business model that did not work anymore," Celentano wrote in an email. "If Keyes would have seen the changes that were evolving in this industry in the past few years, Blockbuster would not have been in the courts today filing Chapter 11 protection."

Specifically, Celentano questioned Keyes relationship with corporate raider Carl Icahn, a former board member and investor, who reemerged earlier this month reportedly acquiring a third of Blockbuster's senior debt. Icahn is said to have been a key driver in pushing through the DIP financing, and is expected to play a role in the restructured company.

"Icahn, who handpicked Keyes for this job, has basically been handed this company from his good friend," Celentano wrote in his email. The investor, who said he sold all his Blockbuster shares Sept. 22, said he looks foward to a day in court when "those involved" will be "held accountable" for their actions.

Longtime Blockbuster analyst Michael Pachter, with Wedbush Morgan Securities in Los Angeles, questions whether the rental icon can overcome such a large brick-and-mortar footprint. Pachter said offering a large retail selection and service requires space and staffing, and puts Blockbuster at a cost disadvantage to chief competitors such as Redbox and Netflix.

“So long as they participate in brick-and-mortar rental, they will have higher overhead costs than Netflix and Redbox, and will be forced to charge more,” Pachter said. “It’s too late for Blockbuster to revive its online offering, and would take way too much capital for them to compete effectively with Redbox, so I think we’ll just see Blockbuster continue to slowly waste away.”

Blockbuster (following Movie Gallery's liquidation) had a 22% share of the rental market, compared to Netflix's 36%, Redbox's 25%, and other retailers' (independents, small chains and subscription services) 17%, according the Home Media Magazine market research.