Blockbuster gets debt reprieve as losses mount

By Reuters
Posted Aug. 13, 2010 at 5:17 p.m.

Blockbuster Inc. has won its second debt-payment deadline extension in as many months, but the struggling video rental chain reported a wider loss and warned it might have to liquidate, sending its shares plummeting more than 20 percent Friday.The once-dominant U.S. video store operator teetering on the brink of bankruptcy is saddled with more than $1 billion of debt. It said Friday that it signed a forbearance agreement Aug. 12 with creditors representing about 70 percent of its senior secured notes, extending the deadline on payment to Sept. 30.

Blockbuster has struggled to compete in an evolving digital marketplace and is bleeding market share to nimbler rivals such as Netflix Inc. and Coinstar Inc.’s Redbox kiosks.

Analysts say a prepackaged bankruptcy may be the company’s best option.

“There’s enough value there as an ongoing business that they won’t go into liquidation,” research analyst Edward Woo of Wedbush Securities said. “It’s not the preferred option, but everything is on the table.”

The company put investors on alert that it might file for Chapter 7 and liquidate its assets, despite persistent attempts to reorganize, according to a quarterly filing with the U.S. Securities Exchange Commission.

It might have to go that route if it cannot get the debtor-in-possession financing needed to operate in bankruptcy or implement a plan of reorganization. Blockbuster previously said it might have to file for a prearranged bankruptcy under Chapter 11.

Blockbuster’s second-quarter loss widened to $69 million, or 32 cents per share, from $37 million, or 21 cents a share, a year earlier. Revenue fell to $788 million from $982 million.

Its woes reflect the state of the traditional U.S. video rental industry. Movie Gallery Inc., operator of Hollywood Video, filed a plan with a federal bankruptcy court last month to liquidate operations. It first filed for bankruptcy in 2007 and emerged for less than a year before unraveling.

Chapter 7 involves a company liquidating its assets; in Chapter 11 a debtor proposes a plan of reorganization to keep its business alive and pay creditors over time.

A liquidation or shutdown of a large portion of Blockbuster’s 3,425 U.S. stores would benefit Redbox¬† more than¬† Netflix, because the kiosk operator shares a similar customer base accustomed to physical rental locations, said Gabelli & Co. analyst Brett Harriss.

Analysts expect the chain that came out of nowhere six years ago to an become the operator of 26,900 automated kiosks around the U.S. to continue expanding at a frenetic pace.

“It’s going to be a volume game for Redbox,” Harriss said. “What they want to do is sign up profitable kiosk locations, get their kiosks out there, make sure the studio partners are happy.”

The company’s debt reprieve announced Friday marked the second extension since July. Last month, it entered into a forbearance agreement with also about 70 percent of its noteholders and elected not to make a $42.4 million interest payment on bonds due July 2.

Blockbuster said it signed the forbearance agreement on Aug. 12 with noteholders representing about 70 percent of its senior secured notes — the same percentage as with the previous agreement. It said it was in talks with noteholders as well as strategic parties to try to restructure its balance sheet and acquire additional capital.

Blockbuster shares were down more than 20 percent at 14 cents over the counter.

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One comment:

  1. jack (me) Aug. 13, 2010 at 11:09 a.m.

    Getting more time to recapitalize is irrelevant if your business model has been rendered obsolete by Netflix and Redbox. I don’t think that the slide rule and typewriter manufacturers are still looking for time to turn it around.