Blockbuster on Death Bed

Blame it on Netflix, Coinstar, Apple and Walmart

 

6/11/10 - It was only a couple of years ago that Blockbuster offered consumers the convenience of getting in their cars to purchase a plethora of movies and videos.

Now, Blockbuster itself looks like a dinosaur.

In Hollywood, 3D is all the rage and Blockbuster can't provide the same film-enjoying experience. And, Netflix trumped Blockbuster with its digital connection.

At the same time, Blockbuster is holding talks with bondholders to get as much as $150 million in debtor-in-possession financing.

The question any prospective financier would ask is: Can a company that seemed to be on the cutting edge in the 20th century still have enough relevance now to compete in the digital media economy?

The answer is not so clear since no one knows if consumers would miss the company if it faded to black.

5/25/10 - Blockbuster's effort to reduce its $900 million debt load has hit a snag. The company and bondholders have been squabbling over how much money the investors would pump into the struggling movie-rental chain. The company had about $110 million in cash and cash equivalents at the end of the first quarter. It posted a $65.4 million loss for the first quarter of this year.

One group of bondholders has offered to wipe out the $300 million in debt owed them in exchange for the "lion's share" of new equity in a retooled company. These bondholders, who are at the back of the line for repayment, would also get $125 million of new debt with lenient repayment terms for Blockbuster.

But those discussions have bogged down of late, as the two sides debate how much new money Blockbuster needs to fund its business. The bondholders have proposed investing around $30 million, but Blockbuster wants $100 million.

Blockbuster is also talking to a separate group of bondholders owed roughly $630 million about canceling amortization payments for an extended period, currently running $20 million a quarter. Those bondholders, who rank highest in the company's debt-payment pecking order, want a good chunk of equity in Blockbuster in exchange for giving up those payments.

A Blockbuster spokeswoman said the company has received several restructuring proposals and indicated that NCR, which provides the movie-rental chain with Blockbuster Express-branded vending machines, might invest.

3/17/10 - Fitch Ratings has downgraded $963.6 million of debt outstanding to junk status. The downgrade of Blockbuster's ratings follows the company's 10-K filing which outlined its initiative to exchange all or a part of its senior subordinated notes for class A common stock.

The company may seek certain modifications to the senior secured notes. Assuming that an agreement can be reached with the holders of the notes in terms of an exchange, an exchange will occur during the latter part of the second quarter or early part of the third quarter of this year.

Blockbuster also stated that it is possible that a successful exchange will require the company to make a pre-packaged, pre-arranged or other type of filing for protection under Chapter 11 of the U.S. Bankruptcy Code. Fitch believes the transaction as contemplated constitutes a coercive debt exchange (CDE) which is considered a default.

Following this event, Fitch will review the company's credit profile and its modified capital structure and assign a new credit rating. However, if the CDE is unsuccessful, Fitch views the probability of a default or bankruptcy as very high.

Fitch remains concerned about the company's operating model and pressures on its business due to the changing industry dynamics and intense competition from various channels. Given the deteriorating operating performance, Fitch expects credit metrics will continue to weaken in 2010. However, Fitch believes Blockbuster maintains adequate liquidity to make its April 1, 2010 debt payment of $43 million. At 2009 fiscal year-end, Blockbuster had $247 million in cash and cash equivalents, which includes $59 million in restricted cash.

Fitch's recovery analysis assumes a liquidation value of $423 million in a distressed scenario. Applying this value across the capital structure results in good recovery prospects (51%-70%), for the senior secured notes. The senior secured notes are guaranteed by Blockbuster's domestic subsidiaries and are secured by a first-priority lien on substantially all of the company's and the guarantors' assets such as land, buildings, improvements, equipment, furniture, permits, licenses, subleases, and real estate tax refunds owned by Blockbuster as well as collateralized by pledges of stock of all of the company's domestic subsidiaries. The senior subordinated notes reflect poor recovery prospects (0%-10%) in a distressed case.

2/26/10 - Blockbuster shares closed at 30 cents/share. The company's fourth-quarter loss widened to $435 million, or $2.24 a share, on a charge related to the diminished value of certain assets (Note from Jeffrey : read that as unusable inventory of bad films and high rental real estate). Last year, Blockbuster lost $359.8 million or $1.89 a share, in a year-earlier period that also included an impairment charge.

 Excluding items, Blockbuster said its adjusted net loss was $44.3 million, or 24 cents a share. Revenue fell to $1.08 billion from $1.31 billion. The company also said it continues to explore various recapitalization possibilities.

(Note from Jeffrey : Blockbuster is like a person who has fallen into the ocean, is tired of treading water, and is going to sink and die but does not know it. Unless a miracle happens, you can expect Blockbuster to be out of business within the next 6 months. They have nothing left to offer the public given the extreme competition from Netflix and Coinstar in the physical market and Amazon, Google, Apple and Walmart wading into the download streaming market.)

2/17/10 - Standard & Poors lowered Blockbuster Inc.'s corporate credit rating to CCC from B-, indicating that the video rental chain is "vulnerable to default." "The downgrade reflects their view that performance will remain very challenged and their concern that Blockbuster will not be able to transform its business model over the near term, given the competitive pressures in the rapidly evolving domestic media entertainment industry. Outlook : negative.