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

[Evad the Slayer]

I remember Blockbuster as a smug bunch of jerks who years ago got away with accusing customers of all kinds of crap. Good bye and good riddance. I went with netflix the minute they started shipping and never laid a foot inside a B store again.

[NameRequired]

If delivering 15-20 DVD's to 3000 stores is a poor business model, delivering 2-3 DVD's to 6000 kiosks isn't much of an improvement.

[Shazam]

Blockbuster is just another poorly run company with horrendous customer service that will soon be history. The bankruptcy filing is just a band-aid attempt to save a dying company. Circuit City anyone?

[IMMACATE CARPET CARE]

That computers putting holly wood out of business and other ones .THEY TOOK OUR JOBS!

[krameel]

If I was the CEO of Blockbuster, I'd have bought as much shares of Netflix as soon as it went public. The stock prices for Netflix after its IPO was under $5 bucks or something. Instead of attempting to merge with Circuit City (which went on to bankruptcy and liquidation), it should have at least tried to merge with CoinStar (Redbox parent company) to add onto its online service rivaling Netflix. Possibly add on an online only porn movies. If Blockbuster gets out of bankruptcy and continues as a going concern, the first order of business is to fire its CEO.

[Anon]

Damn!! I purposely left Netflix and went with Blockbuster online because I hated waiting a WHOLE DAMN MONTH for a movie from Netflix when it was sitting right there in the Blockbuster store. And I really like the fact that I can take one of my online movies to the store on a Saturday or Sunday and exchange it for a new movie that may be in my queue but I would have had to wait for snail mail to deliver it days and days later.
Netflix lost me when they made that stupid deal to not give us the new movies right away. I'm not about to go buy a movie that I haven't even seen, just so I can see it a bit early...but I will rent it and if I really like it...I may buy it. Stupid studios!

[Common sense]

For people saying they boycotted Blockbuster back in 1990, move on!!! I mean it's been 2 decades and things change. I agree some people are idiots and can ruin your experience but its a large corporation and those people probably don't work there anymore anyways. You're going to go to some box and rent a movie for a $1 a day that you will probably keep a week anyways. Yeah its $5 to rent a movie from Blockbuster but you get it for 5 days anyway and for those of you complaining about late fees, it's only a $1 a day. Wow that means if you get a movie from Blockbuster and keep it 7 days its still only $7. You want a break because the economy sucks well think about how many people will be out of jobs and how the economy will be if they close. Seriously think about it where don't you get charged fees?

[Matt McHugh]

Looks like there's going to be a surge of barista applications to Starbucks.

[Amanda]

@ Eric Peters, Blockbuster instilled late fees starting March 1st, how do I know? Because I work there. It amazes me at how customers get angry at us, just the retail people, for their movies being late and having late fees on their account, I laugh at them (behind their backs of course). What I really want to say to their face is 'so you rented this movie, I told you the rental policy, the due date is on the receipt, it's your fault that you returned them late, I'm just doing my job get over it and and pay the late fee and let me move on with me life'. But pertaining to this article, this doesn't surprise me in the least bit, our store is always slow even with back to school time, which is usually always busy.

[Paul]

Wow! What a difference!

[Ezra]

If Netflix raises their rates, more people will use Pirate Bay. I am already a happy pirate. Since I paid for my computer with cash and only use other people's Wi-Fi connections I don't feel particularly worried about getting caught. I can download some movies in 15 minutes on Pirate Bay. Why buy the cow when you can get the milk for free.

[WhiteGlossy]

Wow!!! Just wow!!!! http://whiteglossyundergroundboard.com/2010/08/27/blockbuster-k-o-ed/

[asa]

Hey, Blockbuster dudes, remember when you bankrupt Warehouse and the mon and pops? Sure, you do. You were all giggles and high fives.

Dudes, did you not know what comes around goes around?

Karma forever, dudes.

[juliejeweler]

This is so sad. I love Blockbuster. Redbox sucks because there is a minuscule selection. Netflix sucks because you have to wait for your movies unless you stream them, and who wants to watch a movie on their computer unless you're either travelling or have a giant screen? Blockbuster always has a great selection of both new and old movies, and their late fees aren't exorbitant like everyone on here is bitching about. How is a dollar a day (same as redbox!!!), up to a certain time limit (I believe 10 or 14 days) highway robbery? I will be sad if they go out of business, not only because then I'd have to find something else to do on a Saturday night, but because so many people will be out of work.

[steve]

To Amanda the Blockbuster employee who wrote today-

Let me tell you something. I never returned a movie late and Blockbuster would demand....demand....late fees from me. So I said OK...you want to play this game, next time I'm writing down the exact time I dropped it in the drop box. Nope. Same thing. Accused me of returning it late and of course I was the bad guy for daring to challenge "The Computer". I said there is no way I am going to pay this late fee again and I will challenge it with my credit card company and report you to the BBB. The manager took it off and acted like he was doing me a favor. I told him to now cancel my account which he did as well. I'll never forget it. I knew then this was part of Blockbusters business plan (the late fee then was 5 dollars a day) and I DO NOT reward thieving businesses. BB drove me to Netflix. Amazing.

The glee we all feel here is because of BB heavy handed tactics of what amounts to stealing from customers. That is why we are all so happy to see them go down. You can laugh at the BB customers all you want. No one cares. We laugh at your company and will gladly dance on its thieving grave.

[ZZZZZZZZZZZZZZZZZZZZZZZ]

I love this, didnt this same story come out a few months ago, and before that last year they said blockbuster was going to close down by the end of the year. Someone miss heard and leaked bad info thats all this is. So sorry to disappoint you all there not going any where any time soon, And to all the people that have late fees that they feel are not vaild, instead of boycotting and Bitching about fees, why dont you go up to your store if it's still around and explain whats wrong with your account, dude, more likely they will take the balance off, not every one that is in the store is a bad person or gives bad customer service this goes for every place and every job. And as I read through these comments it looks like the people who posted them havent been in a Blockbuster store since the late 90's , sorry guys they dont rent out VHS anymore , and as for you Redbox and Nexflix Fallowers Blockbuster has just about all the new movies each week. You guys have to wait for 28 days to watch them after they come out. And the Blockbuster express (Blockbuster's Anwser to REDbox)is growing Last I look Tomthumb got rid of there Redboxs. :(, ya so before anyone else posts some silly crap please go to the nearest Blockbuster, However you might have to drive a bit further since they have closed the 4 stores that were near your house. Talk to the people look at the Rates and plans, then drive back 30 miles to your home , past the 4 Blockbuster stores that have closed down that were near your house, come back here and comment. Have funnnnnnnnnnnnnnnn

[Rahul from Forex Bulletproof Review]

Not sure what took Blockbuster too long to open Kiosk like Redbox.

I agree with studio owners that Blockbuster needs to be in existence else it will be complete monopoly for Netflix. Blockbustor's new initiative of allowing video game rentals in the same subscription as of DVDs is something that may become popular.

[woohoo]

I hope they make a movie about the Blockbuster empire...............so I can download it and watch it.

[bama no]

I can't believe people are so down on Blockbuster. I live in Anchorage, Alaska and the Blockbuster stores here, their employees and inventory are great. Classic and older movies, 5 days for $1.00. What more do you want! ZH

[Annoyed Consumer]

Yes!!!!!! The evil corporation that held me accountable for my actions is going out of business. Its about time those "thieves" got shut down. I mean honestly I just turned the movie in like 2 months late I shouldn't haft to pay anything on that. Man and I really hated the fact that their late fees where the exact same as Red Boxes or the fact that they had those like 3 programs I could have signed up for that would have stopped those late fees from ever happening. Man that selection was bad too (mainly because I just kept all the good old movies since they only charged me for the used sell price of it). Then those customer services guys always annoyed me with their recommendations of those movies that where from the same genre, actor, or director. Man they where such a horrible place............ wait a minute. They actually wasn't so bad and I was just buying in to all the mega annoying things that people who haven't actually stepped in to a BB in 2 decades (your words) where complaining about. Dang and their is all those people who are going to lose their jobs all the way from store level to distribution to management. That is only going to make my line at the unemployment office go up....... :(

[Anonarchist]

Good riddance. Netflix and Redbox have rendered them irrelevent and obsolete.

[steve]

To those supporting Blockbuster-

What part of the posts we've made about BB charging for late fees WHEN THE DVD WAS NEVER LATE do you not understand?! No one is saying they are not willing to pay for a late fee if their DVD was actually late. THE PROBLEM IS BB APPLIED LATE FEES ILLEGALLY and this was systematic. So read the comments correctly. No one is trying to blame anyone else. They are fairly blaming AND EXPOSING BB for its systematic abuse of consumers and those consumers are now happily venting and telling BB why they drove us away from them to Netflix and Redbox. You think I care if I have to wait a few more days to watch a movie? As long as my money doesn't go to BB I'm happy. I wouldn't rent from BB if they charged 25 cents a movie because knowing their history they would just make it up another way.

BB is like Jiffy Lube. They suck you in with a 20 dollar oil change and then try to upsell you on things you don't need. Like an air filter I just replaced myself a week ago you thieves. CAVEAT EMPTOR AMIGOS!

[john]

People seem to really hate blockbuster; I never used video stores because they're too expensive; blockbuster failed apparently for two reasons; poor customer service and a static business model. They failed to see the changing trend(netflix, redbox) and then it took them years to adapt to it and in doing
so they failed to add any innovation or compelling reason to use their service.
However I think they can still compete; one with redbox someone mentioned their prime locations which is true however I stopped using redbox because their selection sucks; the most popular dvds are always empty. Blockbuster can compete with netflix by lower pricing agnd better customer service; also perhaps due to blockbuster's experience and longevity they could leverage that to create contracts with the industries to sell movies,dvds online(like apple is trying to get into) or even stream to existing set tops.
However I think if blockbuster really wants to be successful they have to be innovative and branch out, look beyond the current market of movies and video games and enter or create a new market. Companies in the past have completely reinvented themselves and become successful; it's time for blockbuster to do it.

[rc]

Blockbuster mgmt will has to show cause why the shareholders are not entitled to
such a proposal

One plan for equity and jr debtholders goes as follows

Jr debt holders and equityholders agree to a division of the company equity in
exchange for $300 mil in debt relief by the 2012s.

A third party then comes in to meet the company's cash needs..
Those needs include. $42 mil to be current on int and principal on the 2014
notes. Taking the long term debt position to $597 mil.

Enough cash to sustain the business.

Company currently maintains a $69 mil balance, so an infusion of $150 mil, will
leave the company with $69 mil plus $108 mil. after the $42 mil is payed to the
2014s.

A total of $177 mil with $597 mil in debt.

The company then proposes to raise cash as follows.

An asset sale, the kind we were told was coming atthe time the $634 mil debt
deal was approved.

That cash goes to pay down the $597 mil in debt, $97 mil of such, drops BBI's
debt to a very manageable $500 mil with $177 mil in cash.

As the stock recovers with much less bond interest owed, a public stock offering
to reduce debt can be floated.

$200 mil raised and BBI's debt will drop to $300 mil with $177 mil banked.
And that's if the company does no worse than breaks even on a cash flow basis.

The question to be decided is this. How much equity does an investor want in
exchange for $150 mil in a BBI with $300 mil less debt than today ?.
If that number is 60% of the equity, than BBI's two other stake holders will see
20% each in the enterprise.

This is the equivalent of valuing BBI at just $250 mil. while carrying $300 mil
less in debt.

Moreover, the cash infusion of $150 mil lowers the debt to cash position to just
$420 mil from $870 mil. a near $500 mil improvement.

With NFLX worth $6.5 billion, what is a rejuvenated BBI worth doing 180% of
their revenue at higher gross margins ?

Any comments on this

[Travis]

Goodbye Blockbuster...you video Nazis.