Blockbuster tells Hollywood studios it's preparing for mid-September bankruptcy

After dominating the home video rental business for more than a decade and struggling to survive in recent years against upstarts Netflix and Redbox, Blockbuster Inc. is preparing to file for bankruptcy next month, according to people who have been briefed on the matter.

Executives from Blockbuster and its senior debt holders last week held meetings with the six major movie studios to discuss their intention to enter a “pre-planned” bankruptcy in mid-September, said several people familiar with the situation who requested anonymity due to the sensitivity of ongoing talks.

Blockbuster is hoping to use its time in Chapter 11 to restructure a crippling debt load of nearly $1 billion and escape leases on 500 or more of it 3,425 stores in the U.S. Maintaining the support of Hollywood's film studios during the process will be critical so that Blockbuster can continue to rely upon an uninterrupted supply of new DVDs.

Blockbuster has lost a total of $1.1 billion since the beginning of 2008 and has been severely hamstrung in efforts to grow its business due to interest payments on $920 million in debt. Earlier this month the company announced that most of its debt holders had agreed to a forbearance on interest payments until Sept. 30, during which time it would attempt a recapitalization.

Last week Dallas-based Blockbuster's chief executive, Jim Keyes, came to Los Angeles to hold individual meetings with executives at studios including 20th Century Fox, Paramount Pictures, Sony Pictures, Universal Pictures, Walt Disney Studios and Warner Bros. He was joined by a team of restructuring consultants hired to help turn around the struggling company, along with its senior debt holders who would likely end up owning a substantial portion of Blockbuster following bankruptcy.

Former Sony Pictures home entertainment president Ben Feingold, who is serving as an advisor to the debt holders, was present as well.

Though its plans are not yet set in stone, people knowledgeable about the discussions said the Blockbuster representatives presented a mid-September bankruptcy as the most likely scenario. It would enter what is known as a “pre-planned bankruptcy,” meaning most but not all creditors would be on board ahead of time, including senior debt holders and content suppliers.

One of the primary goals of the bankruptcy process, which the company said it hopes would last about five months, would be to escape costly leases for some of its worst-performing stores. Though Blockbuster hasn’t decided exactly how many locations it would seek to shutter as part of a bankruptcy, executives told the major studios it is looking at between 500 and 800.

Blockbuster closed nearly 1,000 stores in the last year alone, a reflection of consumers’ rapidly declining interest in renting DVDs from retail locations now that they can rent them from ubiquitous kiosks in grocery stores, in the mail, or via the Internet.

If it successfully exits bankruptcy, Blockbuster has told Hollywood studios, it hopes to grow through non-retail initiatives. Kiosk manufacturer NCR Corp., for instance, has already deployed about 6,000 Blockbuster-branded kiosks that, like Redbox, rent DVDs for $1 per night.

The company also hopes to expand its presence in the still nascent digital distribution space, through which a growing number of customers are downloading or streaming movies on computers, Internet-connected televisions, and mobile phones.

Most studios are believed to be supportive of Blockbuster’s efforts, as they want to see it remain in business as a viable competitor to Netflix and Redbox, particularly since the formerly second-largest DVD rental store, Hollywood Video parent firm Movie Gallery Inc., went out of business in April.

But there are still some issues to be resolved, including the company’s desire to continue offering movies from all the studios on the same day they go on sale. Fox, Universal and Warner have all instituted a 28-day window on rentals through Redbox and Netflix.

The studios would likely be protected from any significant losses on payments Blockbuster might owe them at the time it files for bankruptcy under the proposed plan. But they would lose revenue from any stores shut down.

The parties most impacted would be Blockbuster’s junior debt holders and the landlords of leases that would be canceled under the proposed bankruptcy. It remains to be seen whether they would attempt to challenge a plan that left them with a fraction of what they are owed.

If the company does not enter bankruptcy, it would need to find a new investor or convince its debt owners to significantly reduce its interest payments for the foreseeable future.

A Blockbuster spokeswoman declined to comment on the studio meetings. In a statement, she said, “The extension of our forbearance agreement is a strong sign of support from our senior secured noteholders as we work toward putting in place a more appropriate capital structure to support Blockbuster’s long-term growth. … Our discussions continue to be productive and we have every reason to believe we will come out of the recapitalization process financially stronger and more competitively positioned for the future.”

Blockbuster stock, which last month was delisted by the New York Stock Exchange because of its ongoing low price and moved to the over-the-counter market, closed Thursday at 11 cents. The company’s total market value is $24 million.

In 1994 it was acquired by former owner Viacom Inc. for $8.4 billion.

--Ben Fritz

Photo: A Blockbuster store in Dallas. Credit: Ron Heflin / Associated Press

Comments

[Betty Boop]

DVD's are so last decade. Who uses those things anymore?

[August]

They'll liquidate.

[Rocco]

I like Blu Ray DVDs. I still get them at Blockbuster, and they're still selling out the new and popular titles.

[The Frosty]

Crap, 11 cents from an 8.6 billion dollar sale.
See yah.

[Eric Peters]

I personally boycotted Blockbuster after they sent a collections agency for $10 for a movie I returned late (so much for "no more late charges")...I mean come on, do you really want the $10 or do you want me to rent more movies from you?

[wake up]

Blockbuster's business plan had them earning more from late fees than from rentals.
Their policies were designed to rip off the customer.
Good riddance, Blockbuster. May their failure be a example to banks and credit
card companies with designed late fees.

[pablo]

Good riddance. I HATE blockbuster, their late fees were ridiculous! They were also so used to making $5 per movie that they allowed others that rent for $1 and monthly via mail to take their business. Now they are trying to play catchup. Their management is stupid and has no vision, and this little exercise will only delay the inevitable.

[Eagle Spears]

Blockbuster lost their customers to their heinous late fee policy.

Their computer systems were nationally integrated to ensure a late fee incurred in Bangor Maine could be assessed if you moved to Seattle Washington but they couldn't use any of those databases to ascertain rental patterns or realize it was Blockbusters asinine policies which lent life to NeTFlix.

There is still a need for retail movie rental like Blockbuster...but it just shouldn't be Blockbuster.

And trying to compete with RedBox...c'mon, RedBox as already staked out the best locations for kiosks and how Blockbuster plans to make their Kiosk better if they charge the same amount and with the same inventory is retarted.

[Bob dole]

They're filing for bankruptcy because they're STILL a rip-off.

and they never have what I want to rent in stock, except for new movies. but who cares about that? new movies suck!

[AmericanMike]

I quit renting their movies when they decided to jack the prices up at a time when we were all losing our jobs. Let this be a lesson to the grocery stores.

[Logic and Reason]

Come on, give netflix the props for pushing Blockbuster to liquidation.

[El Guapo de la ciudad de Los Angeles]

I remember the days when you'd have to no choice but to rent Blockbuster's censored version of a movie so they could lay their "family values" morality on you. Videos are cheap enough now to own so why go to on their stores? What a hassle.

[Dbart]

I can't wait to see Blockbuster go bust. The soaring rental prices and late fees are heinous enough. But when you add a brick-and-mortar box full of D-rated action flicks that never made the big screen, it's a worthless biz model. Bottom line: Blockbuster has few movies worth renting.

[JPA]

I've been using Blockbuster's by-mail service with in-store exchanges for a couple of years now, and I love it. Unlike Netflix, you can exchange your movies in a store if you want something immediately, and they don't charge extra for Blu-Ray. They just added video games to the service, too, and didn't increase my monthly cost at all. It's a shame more people don't use it. Aside from online streaming, it's better than Netflix.

They certainly had bad business tactics for many years, but I don't want to see them go out of business, because it would simply open the door for Netflix to begin doing the same thing.

The bankruptcy will hopefully allow them to trim down to basics and refocus their game plan on by-mail rentals and online streaming.

[Anonymous]

BLOKA going bankrupt? That's a shocker! Who's in the mood for penny stocks?

[O.J. B Innosunt]

Here's an idea: let's find those jurors who acquitted O.J. Simpson back in 1995, give them all the information about Blockbuster's financial status, then let them decide if the company should file for bankruptcy. Without a doubt, they'll reach the conclusion that Blockbuster is doing great and should enjoy record profits for at least another century.

[Clay Landon]

Honestly, who is going to miss Blockbuster?

[Ray McConn]

Can't wait for them to disappear. I have never gone back there since the early 90's when I found out the hard way that they edit ALL their movies as they see fit. No warning or nothing. I can 'edit' my own 'art', thank you very much.

[Greg Maragos]

I think I smell another bailout. Think of all the jobs that will be saved!

[Christina B.]

Oh, they'll definitely liquidate.

[MikeP]

Isn't it annoying when the technology paradigm changes and you're left holding the old-technology bag.

[All Hallows Eve]

Their customers already expected it.

I've boycotted them since 1998 after they sent me a $24.00 bill. A VHS tape that I had just finished watching, dropped in the drop box, they claim was damaged. The store manager treated me like a criminal when I called to inquire about the bill. I never went back. They lost WAY more than 24 bucks by losing me as a customer.

Good riddance BB!

[Chris Miller]

Good riddance to a very poorly run company with the world's worst ever customer service. If I didn't go to my regular neighborhood store I was harassed by the 20 year old employees and asked a series of questions as to why I was not at my regular store renting a DVD. The concern by blockbuster was that I owed money to one store and was forced to rent from another. How difficult is it for them to have a central system? A central system would have been less expensive than poor customer service with very accusatory questions. Then there was blockbuster.com. I decided to try bb.com after already being a customer of netflix for over a year. The selection on bb.com was pathetic and they had a huge technical problem. I had to change my credit card and they accidentally created an additional account for me under both cards. One cue I could not access and it was empty while the other que was full. They did notknow about the full one and never shipped from it whilst i never knew about the empty one. Since they had no que to ship from I received 3 dumb movies that I never ordered each month. No one in customer service could figure out the problem and instead of helping me they would berate me. Finally, someone figured it out and closed the empty account. They claim they shipped the movies I wanted, but i never received anything. So they stopped sending me movies - therefore, I canceled. After canceling several times they kept my account open and charge me each month. I stopped the payments though my BofA, but they would reinitialize them. This went on for several months - me not getting movies and them charging me each month. All in all I spend 10 months with them and received less than 5 movies. Then, after all this, they had the gull to try and charge me for three movies I never received. worst of all is the way they treated me as though i was a criminal trying to get over on them.

Ordinarily I hate to see a company in trouble financially, but in the case of blockbuster I will celebrate.

[yaya]

I'v been waiting for this day. I share the same sentiment as many who have commented. Blockbuster lost me as a customer to Netflix in 2002 after repeatedly charging late fees even for moves that were returned on time but checked in late. They always seemed to have a policy in place that justified this act. I finally had enough, and with Netflix, was able to successfully boycott Blockbuster since than. Good Riddance.

[DG3]

From a value of 8.4 BILLION to only 24 MILLLION now.

Ouch.