Block­buster files Chap­ter 11 exit plan

Video rental firm’s pro­posal would al­low it to wipe out nearly $1 bil­lion in debt.

Los Angeles Times - - Business - Ben Fritz

Af­ter nearly three decades in busi­ness dur­ing which its name was syn­ony­mous with video rentals, Block­buster Inc. is hit­ting the rewind but­ton.

The re­tail gi­ant filed a long-ex­pected Chap­ter 11 bank­ruptcy re­or­ga­ni­za­tion plan Thurs­day that will al­low it to wipe out nearly $1 bil­lion in debt that has hob­bled its abil­ity to com­pete. In Au­gust, Block­buster told the Hollywood stu­dios that it would shut down 500 to 800 of its 3,306 U.S. stores as part of its bank­ruptcy.

Un­der the plan filed in U.S. Bank­ruptcy Court in New York, the own­ers of $630 mil­lion of Block­buster’s se­nior se­cured debt would ex­change their bonds for full own­er­ship of the com­pany. The own­ers of an ad­di­tional $300 mil­lion in un­se­cured debt would see their claims wiped out, as would those who own the com­pany’s vir­tu­ally worth­less stock, which closed Thurs­day at 4 cents a share.

Its largest sin­gle share­holder would be Carl Ic­ahn, the ac­tivist in­vestor who has a long his­tory with Block­buster and is also the largest share­holder in Lions Gate En­ter­tain­ment Corp. Ic­ahn has re­cently been buy­ing up Block­buster’s debt and cur­rently owns about a third of the se­cured bonds, ac­cord­ing to a per­son fa­mil­iar with the mat­ter.

Block­buster is bet­ting that by elim­i­nat­ing debt pay­ments and can­cel­ing the leases on its worst-per­form­ing stores, it can re­turn to prof­itabil­ity as a smaller,

more fo­cused ven­ture.

“Once they get their costs in line and fo­cus on the profitable stores, there’s a strong play here,” said Larry Nuss­baum, the man­ag­ing di­rec­tor of pri­vate eq­uity firm Ver­tex Cap­i­tal, which ac­quires and turns around dis­tressed com­pa­nies. “The Block­buster brand still has value.”

The com­pany re­ceived ap­proval Thurs­day of its “first day mo­tions” so that it can keep stores open and con­tinue pay­ing em­ploy­ees and its movie stu­dio sup­pli­ers.

Block­buster dom­i­nated VHS and DVD rentals and was a strong player in sales through­out the 1990s and early 2000s, but failed to re­spond quickly to the rise of DVD-by-mail sub­scrip­tion ser­vice Net­flix and, more re­cently, $1-per-night kiosk com­pany Red­box. Al­though it even­tu­ally launched com­pet­ing sim­i­lar ven­tures, it has been a dis­tant sec­ond in both busi­nesses.

In ad­di­tion, Block­buster was sad­dled with nearly $1 bil­lion in debt as part of its spinoff from for­mer cor­po­rate owner Vi­a­com Inc. in 2004. In­ter­est pay­ments be­came oner­ous, par­tic­u­larly as the econ­omy fell into re­ces­sion and cus­tomers cut back on spend­ing.

Since the start of 2008, Block­buster’s losses have to­taled $1.1bil­lion.

In Fe­bru­ary, the com­pany en­listed a fi­nan­cial ad­vi­sory firm to help it fix its de­te­ri­o­rat­ing fi­nan­cial sit­u­a­tion. Block­buster con­sid­ered nu­mer­ous op­tions, in­clud­ing ne­go­ti­a­tions with two po­ten­tial buy­ers, be­fore fi­nally set­tling on the Chap­ter 11 plan over the sum­mer, ac­cord­ing to an af­fi­davit filed by Jef­frey Ste­genga, the com­pany’s chief re­struc­tur­ing of­fi­cer.

Ste­genga tes­ti­fied that with its debt largely elim­i­nated, the com­pany would be able to im­ple­ment its long-term strat­egy, “which pro­vides for Block­buster to dif­fer­en­ti­ate it­self as the only op­er­a­tor that pro­vides ac­cess across mul­ti­ple de­liv­ery chan­nels.” In ad­di­tion to mar­ket­ing its pres­ence in re­tail, mail, kiosks and on­line, Block­buster will em­pha­size that un­like Net­flix and Red­box, it of­fers DVDs from sev­eral stu­dios in­clud­ing Warner Bros., 20th Cen­tury Fox and Uni­ver­sal Pic­tures the same day they go on sale.

The stu­dios have been largely sup­port­ive of Block­buster’s ef­forts to turn it­self around, ac­cord­ing to peo­ple close to the mat­ter, in hopes that it will re­main a vi­able com­peti­tor to Red­box and Net­flix, as well as a force in DVD sales.

Five stu­dios — Warner, 20th Cen­tury Fox, Uni­ver­sal, Sony Pic­tures and Para­mount Pic­tures — serve on an ad hoc com­mit­tee that has been help­ing with the bank­ruptcy process. Simon Swart, ex­ec­u­tive vice pres­i­dent of Fox Home En­ter­tain­ment, said in a state­ment that his com­pany’s “long­stand­ing re­la­tion­ship with Block­buster has been mu­tu­ally ben­e­fi­cial and profitable, and will con­tinue to be so.”

Al­though they have been sup­port­ing Block­buster, some stu­dios have also been con­strain­ing the amount of credit they ad­vance the com­pany be­cause of its fi­nan­cial woes, Ste­genga said. Most of Block­busters’ deals to ac­quire DVDs from stu­dios are short-term and will ex­pire by Dec. 31.

A court fil­ing says the com­pany cur­rently owes $21.6 mil­lion to 20th Cen­tury Fox, $20 mil­lion to Warner Bros., $13.3 mil­lion to Sony Pic­tures, $8.6 mil­lion to Walt Dis­ney Stu­dios, $8.3 mil­lion to Uni­ver­sal Stu­dios and $7.9 mil­lion to Lions Gate.

Those tak­ing the biggest bet on Block­buster’s fu­ture are the se­nior debt own­ers led by Ic­ahn. In ad­di­tion to con­vert­ing their bonds to eq­uity, they are ex­tend­ing the com­pany a credit line of up to $125 mil­lion so it can re­main in busi­ness dur­ing the bank­ruptcy process. They are also of­fer­ing ad­di­tional credit of up to $50 mil­lion when it ex­its bank­ruptcy.

The re­or­ga­ni­za­tion plan calls for Ic­ahn to se­lect two of seven mem­bers of the com­pany’s board of di­rec­tors once it ex­its bank­ruptcy. In ad­di­tion, he and in­vest­ment firm Monarch Al­ter­na­tive Cap­i­tal, an­other large debt owner, will se­lect a third mem­ber jointly.

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