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

[Gun control]

Someone could have explained to them the notion of the internet and mail service. From the very beginning their tactics were nasty and underhanded to say the least. Good job Blockbuster! Maybe you should go back to hauling garbage in South Florida and monopolizing that industry. Remember the scheme? Well, I watched a Netflix movie tonight and last night to celebrate.

[DG3]

JPA, I too used Blockbuster's online service. It sucked.

Almost all of the movies I wanted to see from Blockbuster were on a permanent 'long wait' status. And who cares if we can take it back to the store, with it's sparse catalog of titles to trade for.

When I switched to Netflix, I could see everything I wanted. They simply had much more inventory.

Give it up dude, Blockbuster's not going to be around for long.

[Baldemar Huerta]

Good Riddance.

[Collis P Huntington]

Now that we watch movies online at sites like Netflix no one wants to hassle with buying or renting discs.

[tomK]

Just another company that did not keep pace with it's competition, and used a method of customer service very close to what the domestic airlines and US banks are doing to us right now, hit your customer with high fees, over and over, hit them with add on's,(Remember the Blockbuster fee for new releases) and poor customer service. They figure, because there's no competition they have you right where they want you. Except as soon as they do that, someone steps in and fills a niche, and their toast, It happened here, and it will happen with the domestic airlines, and eventually if the government allows it, to the US Banks.

[mlandy]

Down with blockbuster! after running a business model based on tricking customers into late fee's by constantly changing the rental terms, I think the street cred of this company is pretty low...

[JD]

This is what happens when short-term greed wins out over a long-term business plan. They are and have always been a vile company.

[HowardLive]

Party at my house!!!

*dances on Blockbuster's grave-to-be*

[MM]

Amazing how alot of you seem happy Blockbuster is going out of business. Guess when all those employees lose their jobs you won't mind them robing you of your work and life. You should want the company to stay so it can support the thousands of employees and families who need the income.

[Chris Miss]

Damn, I just rent the occasional movie there. I didn't know Blockbuster had engendered so much angst among the people. I know this, I can get DVDs and videos dirt cheap at my local used record shop. Now, if it goes out of business, that'll be a real crimp in my lifestyle.

[webslinger48]

Blockbuster shares the same fate as many a massive conglomerate. They largely held a monopoly in the dvd rental industry for a decade, and got too comfortable with it and grew stagnant instead of innovating. They should have beaten Netflix to the punch and same goes for Redbox, if you're not innovating you will stagnate and get pushed out. Blockbuster management was too short-sighted to see the rug being pulled out from under them and their collapse should be a text case in all business schools of how not to run a company. The decision-makers at Bockbuster blew it and look like rookies. Nobody is exactly shedding a tear over their demise. Don't let the door hit you on the way out.

[expatriate prune picker]

Shoulda stuck with VHS...

[jing]

So they want to get out of between 500 and 800 leases because they are bad business people?
I say let them fall and go away. Nobody needs them anymore and they made made business decisions so let them fry.
They had their heyday and a lot of people made a lot of money so...
how much money does the top level management earn? I bet they are a bunch of over paid fat slobs who are the reason this corp failed.

[MSG]

I like Blockbuster. I've never had a problem with them, and their Total Access plan rocked. They'll still be a going concern, which I'm glad to hear. If they eventually liquidate, I'm getting all my movies from Pirate Bay. :-)

[Dodger Tony]

No video stores, no record stores, no book stores. Everything available online or at kiosks. The poverty of community continues.

[Alan Heyburn]

Even when Blockbuster were at their zenith, they paid their employees a pittance. I will be shedding no tears for the demise of this ruthless and amoral company.

[USA Dave]

Blockbuster only charges $1 a day something is late. Why are people complaining so much about that? Also, they never charge you more then the movie is worth used if it's super late or too late to return. They've contacted me a few times about something I'd already returned, but a quick phone call and a search by someone that worked there always corrected the problem when it was on the shelf.

Also, until we can stream/download all the movies available at their store, Blockbuster and video stores in general have the biggest selection to pick from to watch immediately. I'd rather pay more for my movie so they can maintain a collection that large, then to pay a buck and only have a few things to pick from when I want to watch something that second.

It's nice to have a Redbox right there in the grocery store, but they only have a few decent titles. Also, when one of their discs are defective, it's a bigger pain then having the Blockbuster guy just switch it out and restart my rental time.

I'm sure there have been cases where Blockbuster charged you for something you remember returning, but having worked at an equipment rental service before, I've learned that some of you need to look around the house a bit harder. Most likely ticked a few people off with that comment, but seriously...

Look under your couch.

[Mike Appleman]

I am so pleased. Blockbuster is not good at what they do. They only stock the newest movies and never have (and I do mean never) have what I am looking for, including some really big name, very popular films, because they were maybe four years old? I have been told repeatedly "That's an old movie" when in fact, it should be in stock. And any art house or "off the beaten path" movies in stock? Not bloody likely. Long lines, overpriced, bad selection. Your time has come to be gone, thankfully. With any luck you will not be back. I would rather support a struggling, local store, who actually cared about films and the films the folks who live around the store want to see. And I don't appreciate all the B-movies that you seem to only find at Blockbuster that further clutter and waste valuable shelf space. Sure, this is a fairly long "rant" for a video store. But I have really learned to dislike them over the years. Nitey nite Blockbuster and Good Riddance.

[RAR]

They priced themselves out of the market. Made a mental note not to go back when the price for a rental was $5. Netflix is $9 a month.

[Jacob]

It's amazing that I can still hate Blockbuster 20 years after they last gouged me for a late fee, but there it is. Please curl up and die already.

[Have U been in one lately?]

Have you been in one lately? It's so gross.

[steve]

Glad to see all the comments about late fees and the mutual feeling about Blockbusters demise. Normally I feel bad about a company going through tough times. Not Blockbuster.

They tried to charge me late fees when I knew they were not late and then their snooty "managers" would try to make you feel like a criminal WHEN THEY WERE THE CRIMINALS. It was clearly part of their business plan because this happened way too many times. Their short term greed ended their business because like everyone else they finally pushed me to Netflix and I NOW LOVE NETFLIX. Love Redbox too. Good bye Blockbuster. You're guys are thieves and I hope no one ever does business with you again. PATHETIC.

[Jeremy]

Hollywood Video was always so much better and easier to use for a brick and mortar operation. If Hollywood goes into the online game like Netflix to improve their topline performance and adds kiosks to stay competitive with RedBox then Blockbuster who they are already better than is DONE!

[Alan]

This, and the news that the Octomom is having trouble selling her autobiography, give me new hope for civilization. Blockbuster has a crappy inventory, and the last time we rented, we returned the video late and they sent $16 they said we owed out to a collections agency. They never even asked us for the money. They didn't complain that the video was late. They just took the video back and then took aim at our credit rating. Sorry, this is a deal-breaker for me. I paid the $16 just to make it go away, but I will never go into their store or support them in any other way again.

[nunh]

While I hate to see an American business go out of business, I could see the writing on the wall a long time ago - at least 4 years ago. Blockbuster employees I have encountered were complete idiots. Businesses (with the inevitable exception of fast food) that keep employing minimum wage, illiterate, and not personable customer service/ front counter people will all go by the wayside thanks to the internet and creative businesses. I say - good riddance to these a-holes.