An Unexpected Blockbuster Resurrection

Blockbuster Inc. (BLOAQ.PK) is trading at price levels not seen since early spring, as traders responded enthusiastically to a published report that new owner, Dish Network Corp. (NASDAQ: DISH), has no plans to shutter most of the moribund video rental chain’s storefronts.

While Blockbuster has traded at a recent 8 to 10 cents a share, some investors are speculating that the satellite broadcaster’s plan to keep some 1,500 of the 1,700 brick-and-mortar outlets open must mean there’s some profit still to be mined from retaining stock ownership in the fallen king of traditional, direct-to-consumer DVD rentals. Don’t bet on it.

In a recent interview with the LA Times, Dish Network’s chief executive Joe Clayton articulated that the $320 million purchase of Blockbuster last April was integral to transforming the second-largest U.S. satellite TV provider (after DirecTV) from a pay-television service (with about 14 million subscribers) into a bigger player in wireless, broadband and an emerging competitor of streaming, online entertainment content and DVD-by-mail services to industry bellwether Netflix Inc. (NASDAQ: NFLX).

“I Believe!”

That the Blockbuster name still had–and has–value isn’t a new revelation. When Dish Network beat out other bidders in a bankruptcy auction for assets of Blockbuster last April–including merchandise inventories, online demand, by-mail (1.6 million subscribers), and brick-and-mortar customer lists–it was recognized at the time that the acquisition would complement existing video offerings while presenting cross-marketing and expanded service opportunities.

When Blockbuster filed for reorganization in September 2010, it was generally understood that after selling assets and paying down secured debt there would unlikely be any liquid assets left over for the subordinated claims of either preferred or common stockholders.

As of July 12, 2011, out of $1.14 billion owed to bondholders and other creditors, a review of regulatory filings suggests that after liquidation efforts are completed, (at-most) $124.6 will be repaid, principally to holders of $675 million (face value) in senior notes (due September 2014), leaving nothing in proceeds for stockholders.

“Make It a Blockbuster Night”

In active trading, however, investors recently assigned a market capitalization of more than $14 million in value to Blockbuster common stock. Most likely, driven by an unfounded belief there is tangible value to the real estate–those 1,700 brick-and-mortar stores–Dish Networks plans to continue operating.

Unfortunately, the purchase by Dish Networks didn’t include much real estate–just $118 million in fixtures and related-store equipment, according to Blockbuster’s 2010 annual report. Though some franchisees owned underlying properties, the bulk of Blockbuster locations were leased–from landlords (owed in the aggregate) more than one-billion dollars in long-term, noncancelable rental obligations!

When debt settlements and court-supervised liquidation sales are completed in the next few months, common stockholders will find out that it won’t be a “Blockbuster Night.”

David J Phillips