Blockbuster Files for Bankruptcy After Online Rivals Gain
By Dawn McCarty, Linda Sandler and Tiffany Kary - Sep 23, 2010
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.
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’s proposals included bankruptcy for units in Italy, Spain and Canada.
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.
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.
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.
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.
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 will continue normal business while in bankruptcy. 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.
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.
The company has hired Weil, Gotshal and Manges as its legal adviser; Rothschild Inc. as its financial adviser; and Alvarez and Marsal as its restructuring adviser. Lawyers for lenders of the bankruptcy loan are Sidley Austin LLP.
The case is In re Blockbuster, 10-14997, U.S. Bankruptcy Court, Southern District of New York.
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