posted 08-27-2010 09:37 AM                    

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Blockbuster tells Hollywood studios it's preparing for mid-September bankruptcy

After dominating the home video rental business for more than a decade and struggling to survive in recent years against upstarts Netflix and Redbox, Blockbuster Inc. is preparing to file for bankruptcy next month, according to people who have been briefed on the matter.

Executives from Blockbuster and its senior debt holders last week held meetings with the six major movie studios to discuss their intention to enter a “pre-planned” bankruptcy in mid-September, said several people familiar with the situation who requested anonymity due to the sensitivity of ongoing talks.

Blockbuster is hoping to use its time in Chapter 11 to restructure a crippling debt load of nearly $1 billion and escape leases on 500 or more of it 3,425 stores in the U.S. Maintaining the support of Hollywood's film studios during the process will be critical so that Blockbuster can continue to rely upon an uninterrupted supply of new DVDs.

Blockbuster has lost a total of $1.1 billion since the beginning of 2008 and has been severely hamstrung in efforts to grow its business due to interest payments on $920 million in debt. Earlier this month the company announced that most of its debt holders had agreed to a forbearance on interest payments until Sept. 30, during which time it would attempt a recapitalization.

Last week Dallas-based Blockbuster's chief executive, Jim Keyes, came to Los Angeles to hold individual meetings with executives at studios including 20th Century Fox, Paramount Pictures, Sony Pictures, Universal Pictures, Walt Disney Studios and Warner Bros. He was joined by a team of restructuring consultants hired to help turn around the struggling company, along with its senior debt holders who would likely end up owning a substantial portion of Blockbuster following bankruptcy.

Former Sony Pictures home entertainment president Ben Feingold, who is serving as an advisor to the debt holders, was present as well.

Though its plans are not yet set in stone, people knowledgeable about the discussions said the Blockbuster representatives presented a mid-September bankruptcy as the most likely scenario. It would enter what is known as a “pre-planned bankruptcy,” meaning most but not all creditors would be on board ahead of time, including senior debt holders and content suppliers.

One of the primary goals of the bankruptcy process, which the company said it hopes would last about five months, would be to escape costly leases for some of its worst-performing stores. Though Blockbuster hasn’t decided exactly how many locations it would seek to shutter as part of a bankruptcy, executives told the major studios it is looking at between 500 and 800.

Blockbuster closed nearly 1,000 stores in the last year alone, a reflection of consumers’ rapidly declining interest in renting DVDs from retail locations now that they can rent them from ubiquitous kiosks in grocery stores, in the mail, or via the Internet.

If it successfully exits bankruptcy, Blockbuster has told Hollywood studios, it hopes to grow through non-retail initiatives. Kiosk manufacturer NCR Corp., for instance, has already deployed about 6,000 Blockbuster-branded kiosks that, like Redbox, rent DVDs for $1 per night.

The company also hopes to expand its presence in the still nascent digital distribution space, through which a growing number of customers are downloading or streaming movies on computers, Internet-connected televisions, and mobile phones.

Most studios are believed to be supportive of Blockbuster’s efforts, as they want to see it remain in business as a viable competitor to Netflix and Redbox, particularly since the formerly second-largest DVD rental store, Hollywood Video parent firm Movie Gallery Inc., went out of business in April.

But there are still some issues to be resolved, including the company’s desire to continue offering movies from all the studios on the same day they go on sale. Fox, Universal and Warner have all instituted a 28-day window on rentals through Redbox and Netflix.

The studios would likely be protected from any significant losses on payments Blockbuster might owe them at the time it files for bankruptcy under the proposed plan. But they would lose revenue from any stores shut down.

The parties most impacted would be Blockbuster’s junior debt holders and the landlords of leases that would be canceled under the proposed bankruptcy. It remains to be seen whether they would attempt to challenge a plan that left them with a fraction of what they are owed.

If the company does not enter bankruptcy, it would need to find a new investor or convince its debt owners to significantly reduce its interest payments for the foreseeable future.

A Blockbuster spokeswoman declined to comment on the studio meetings. In a statement, she said, “The extension of our forbearance agreement is a strong sign of support from our senior secured noteholders as we work toward putting in place a more appropriate capital structure to support Blockbuster’s long-term growth. … Our discussions continue to be productive and we have every reason to believe we will come out of the recapitalization process financially stronger and more competitively positioned for the future.”

Blockbuster stock, which last month was delisted by the New York Stock Exchange because of its ongoing low price and moved to the over-the-counter market, closed Thursday at 11 cents. The company’s total market value is $24 million.

In 1994 it was acquired by former owner Viacom Inc. for $8.4 billion.

--Ben Fritz

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posted 08-28-2010 11:11 PM                    

quote: Mike Blakesley

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Netflix users, enjoy it while you got it...VOD direct from the studios will probably put them out of business, the same way they put video stores out of business.

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posted 08-29-2010 11:54 AM                    

quote: Ian Parfrey

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That's it exactly. The studios for a long time have viewed ANY link between their product and the consumer to be a drain on STUDIO profits. So, it's Goodbye to Blockbuster- and in the longer term, your local multiplex/Mum & Pop single screen cinema as well.

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posted 09-25-2010 12:21 AM                    

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Blockbuster Files for Bankruptcy After Online Rivals Gain

By Dawn McCarty, Linda Sandler and Tiffany Kary - Thu Sep 23

Blockbuster Inc., the world’s biggest movie-rental company, filed for bankruptcy after failing to adapt its storefront model to online technology pioneered by rivals such as Netflix Inc.

The company listed assets of $1.02 billion against debt of $1.46 billion on a Chapter 11 petition filed today in U.S. Bankruptcy Court in New York. The company said it reached a deal with a group of bondholders on a plan of reorganization and secured a $125 million loan to finance operations.

“To preserve its three-decade long developed brand value, Blockbuster seeks a restructuring that permits a significant deleveraging of its business so that it can move forward at the digital clip at which its industry and competitors are currently running,” Jeffery Stegenga, the company’s restructuring officer, said in a court filing.

Sales at Dallas-based Blockbuster, with about 3,000 stores in the U.S., shrank in recent years while Netflix grew by renting movies online and through the mail, and Coinstar Inc. put Redbox DVD vending machines in supermarkets and drugstores.

The $125 million in secured financing from senior noteholders represents new cash availability. On an interim basis before final approval, $45 million would be available. The financing is to have a lien ahead of existing debt. The financing also calls for converting $250 million of existing secured debt into a new loan with a lien ahead of existing debt.

Largest Creditors

Under the proposed plan, there will be no recovery by the holders of the company’s outstanding subordinated debt, preferred stock or common stock, according to the statement. Blockbuster anticipates it will pay something to unsecured creditors, court papers show. Blockbuster Video Italy Inc., Blockbuster International Spain Inc., Blockbuster Canada Inc. and nine other units also sought protection.

The company’s largest trade creditor is Twentieth Century Fox Home Entertainment with a $21.6 million claim, followed by Warner Home Video Inc. with a claim of $19 million and Sony Pictures Home Entertainment with a claim of $13.3 million, according to today’s filing. Among others waiting to be paid by Blockbuster are Coca-Cola Enterprises, which is owed $703,412, and the advisory firm Moelis & Co., owed $254,050.

The filing “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,” Chief Executive Officer Jim Keyes said in a statement today. Keyes owns almost 1.4 million shares and options on another 7.8 million shares.

Icahn Bonds

Billionaire Carl Icahn bought about one-third of Blockbuster’s bonds as of Sept. 17, according to people with knowledge of the matter. Icahn, 74, a former director of the company, led a proxy fight in 2005 to put himself and two nominees on the board. Last March, he cut his stake in the company to 3.5 percent by selling stock. He left the board in January. He is working with a group of senior creditors in the reorganization plan, the people said.

Before deciding on a bankruptcy financed by senior lenders, Blockbuster said it spent “significant time” through the spring and summer this year discussing potential financing deals with other companies. They included two “large, financially capable strategic parties” and other investors. None of them offered sufficient money for the company to cut its debt enough, Blockbuster said in a court filing.

Bondholder Support

Blockbuster has support for its reorganization plan from a group of bondholders holding about 80.1 percent of the company’s 11 3/4 percent senior-secured notes, it said. The notes will be exchanged for equity in the reorganized company. The company has secured bonds with a face value of $630 million and unsecured bonds with a face value of $300 million, court papers show.

Blockbuster asked court permission in its first-day filings to pay studios on a priority basis, saying its ability to operate depended on the supply of copyrighted material that came from major movie studios. Blockbuster owes about $68.5 million to studios with a secured lien on its assets, and $49.6 million to studios with an unsecured lien, according to a court filing.

About 80 percent of Blockbuster’s annual revenue relies on material from Walt Disney Co.; Icahn buyout target Lions Gate Films Inc.; Paramount Home Entertainment Inc.; Sony Pictures Home Entertainment Inc.; Summit Distribution LLC; Twentieth Century Fox Home Entertainment LLC; Universal Studios Home Entertainment LLC; VPD IV Inc.; and Warner Home Video, Blockbuster said.

Normal Business

After it emerges from bankruptcy, the only debt expected to remain on Blockbuster’s balance sheet will be the $125 million loan, known as a debtor-in-possession loan, the company said. It will convert to so-called exit financing and a revolving-credit line of as much as $50 million.

Blockbuster said all of its U.S. operations, including stores, DVD vending kiosks, by-mail and digital businesses, will continue to operate normally. Domestic and international franchisees aren’t part of the Chapter 11 reorganization, according to the statement. The company said it will no longer provide funding to support its operations in Argentina.

Intana Management LLC, M.A.M. Investment Ltd., Prentice Capital Management LP, Michael Zimmerman and Goldman Sachs Group Inc. were all listed as directly or indirectly owning, controlling, or holding, with the power to vote, 5 percent or more of the voting securities of Blockbuster.

Accounts Payable

Blockbuster has about $57 million of accounts payable, excluding leases and debts to studios. Its global capital expenses are running at $30 million a year, it said in a court filing. Blockbuster’s weekly payroll for employees is $36.5 million. It expects to pay consultants $200,000 in the next 30 days, and officers, stockholders and directors another $178,000, according to court papers.

The company has hired Weil, Gotshal and Manges as its legal adviser, led by Steve Karotkin, was also was the lead lawyer on General Motors Corp. bankruptcy.

Rothschild Inc. was named Blockbuster’s financial adviser, and Alvarez and Marsal was hired as its restructuring adviser. Lawyers for lenders of the bankruptcy loan are Sidley Austin LLP. Judge Burton Lifland was appointed to handle the case.

The case is In re Blockbuster, 10-14997, U.S. Bankruptcy Court, Southern District of New York.

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