Judge clears way for Blockbuster sale

By Dow Jones Newswires-Wall Street Journal
Posted March 11 at 7:44 a.m.

A judge Thursday cleared the way for movie-rental company Blockbuster Inc. to sell itself to a group of hedge funds, after lawyers spent all day in courthouse hallways brokering a deal with movie studios that had objected to the sale terms. The ruling gives the movie studios a better deal and staves off immediate liquidation of Blockbuster’s assets.

Judge Burton R. Lifland of U.S. Bankruptcy Court in Manhattan approved procedures for the auction of Blockbuster, with a $290 million initial offer from a group of senior bondholders led by hedge fund Monarch Alternative Capital.

“The parties have come to an accord and presented us with a more palatable situation,” said Judge Lifland, who spent much of the day huddling with the various sides to improve on a sale that he earlier in the day called “totally unacceptable” and said “would not fly.” The judge agreed to hold the auction in his courtroom.

Several movie studios, who are owed money for DVDs they sold to Blockbuster, had objected to the sale, as the original terms of the deal didn’t offer them the recovery they wanted. One studio, Summit Entertainment, favored the conversion of the case to a Chapter 7 liquidation, as did the U.S. Trustee.

But on Thursday, Blockbuster’s lawyers and lawyers representing the movie studios worked out an arrangement that would steer payments to them from the proceeds of a sale in a way they found more palatable.

Tensions flared between lawyers negotiating the deal earlier in the afternoon in a hallway outside the courtroom.

“You want to blow up the case? Blow up the case!” said Robert Feinstein, a lawyer representing several movie studios, addressing other lawyers.

“The studios are blowing it up!” another lawyer shouted.

“Do it fairly!” Mr. Feinstein responded.

The Monarch-led group’s proposal could be topped by competing bidders in a bankruptcy court auction. “Hopefully, there will be an overbid so there will be 1 8 more 3 8 money available to pay these administrative claims,” said Stephen Karotkin of Weil, Gotshal & Manges, a lawyer for Blockbuster.

“We’re obviously very happy with the ruling of the court,” said Dennis McGill, Blockbuster’s finance chief, just after the hearing concluded.

At least seven other suitors have expressed interest in Blockbuster, said Mr. Karotkin, reading testimony of one of the company’s bankers. Some of those possible bidders are different players teaming on potential offers. Some are interested in pieces of Blockbuster — its stores, vending business or digital operations. In those cases, Blockbuster hopes it can join those disparate interests in a single bid for the company.

Blockbuster will use proceeds from the sale to pay the studios for money owed, and the studios will continue shipping DVDs to Blockbuster stores.

A provision that would allow the Monarch group to convert the case to Chapter 7 has also been removed, said Mr. Feinstein of Pachulski, Stang, Ziehl & Jones LLP, who outlined many of the changes.

“We certainly have a consensus among studios, unsecured creditors, with secured creditors and the stalking-horse purchaser,” Mr. Karotkin said, referring to the opening bidder.

Summit said it will withdraw its request to convert the case to a Chapter 7 liquidation. A lawyer for the U.S. Trustee still argued for a liquidation, although he said that didn’t mean the company would immediately be shut down. Judge Lifland overruled his objection.

Blockbuster bondholders — including the Monarch-led group and billionaire investor Carl Icahn — had said that the company should stay in Chapter 11 and run an auction to get the most money for creditors. The bondholders said half a dozen other suitors may bid on Blockbuster. Even most of the movie studios, while they originally objected to the Monarch-led deal, wanted the case to remain in Chapter 11.

Blockbuster Chief Restructuring Officer Jeffrey J. Stegenga, a managing director at restructuring firm Alvarez & Marsal, testified that a sale of the company would be a better option than a Chapter 7 liquidation.

Blockbuster filed for Chapter 11 protection in September 2010 with plans to reorganize, but lackluster holiday sales forced the company to put itself on the market. Between late September and January, Blockbuster posted a loss from continuing operations of $64.8 million.

The pro-liquidation camp had argued that the original Monarch plan ran afoul of bankruptcy law by steering sale proceeds to certain creditors and for other “critical” expenses, neglecting the studios that believe they have special repayment rights under agreements they made.

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