Blockbuster's Chapter 11 May Be Inadequate

Blockbuster filed for Chapter 11 as expected.

The rental chain declared that  it reached agreement with a group of bondholders holding approximately 80.1 percent principal amount of the company’s 11 3/4 percent senior secured notes on the material terms of a plan to recapitalize its balance sheet and put the firm in a stronger financial position. The recapitalization plan would substantially reduce the Company’s indebtedness — from nearly $1 billion currently to an estimated $100 million or less.

The Chapter 11 is “pre-arranged” so its debtholders have agreed to the terms of the legal action. The case was filed with the U.S. Bankruptcy Court for the Southern District of New York.

Blockbuster will receive “debtor-in-possession” from the bondholders involved. They will trade their other outstanding debt for equity, which means that existing shareholders will get nothing. The stock has traded for pennies for some time.

Blockbuster said it would continue to operate its 3,000 US stores. “All of Blockbuster’s U.S. operations, including its stores, DVD vending kiosks, by-mail and digital businesses, are open and serving customers in the normal course.”

The reprieve is only temporary. Blockbuster has no future, but the debtholders’ only recourse was to make long-shot bet that the firm can come up with some way to salvage its business.

But, the world of video has left Blockbuster behind, or more appropriately, it allowed itself to fall behind. The company stuck with the model of DVD rentals through physical stores. Once it realized that the NetFlix (NASDAQ: NFLX) rental-by-mail business had become the standard, it was too late for Blockbuster. It was also too slow as it tried to get into the business of digital delivery of premium content, a field now crowded by large and powerful companies such as Apple Inc (NASDAQ: AAPL) and (NASDAQ: AMZN)

Blockbuster even missed its chance to enter the DVD kiosk business. Redbox, which created the model, already has kiosks in more than 25,000 locations and require no staff.

Blockbuster may have bought itself a year or two, but that is all it has done. The firm is doomed.

Douglas A. McIntyre

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