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Struggling to avoid bankruptcy, Blockbuster extends debt deadline to Sept. 30 [Updated]

August 13, 2010 | 11:42 am


With interest payments it can't afford looming and its losses mounting, Blockbuster Inc. has bought some extra time from its debt holders to form a new recapitalization agreement.

The new agreement gives the struggling DVD rental chain until the end of September to restructure its debt. It's the second such extension the company has received. If it is unable to reach an accord, Blockbuster will most likely have to file for bankruptcy protection, as it is unable to make its interest payments. Even if it does reach a restructuring pact, Blockbuster warned investors, it may still have to engage in a Chapter 11 reorganization given the continued deterioration of its business.

Dallas-based Blockbuster is still the largest DVD rental chain, but it has seen its business severely diminished by the rise of Netflix and Redbox. On Friday, it reported a 20% drop in revenue for the quarter ended July 4 to $788 million. Its net loss grew 86% to $69 million as the company closed 507 stores in the first half of the year and the more than 5,800 worldwide that remained open suffered continuing declines.

During the quarter, Blockbuster launched a marketing partnership with cable company Comcast Corp. and began offering video games through its rent-by-mail service, which Netflix does not offer. It has also noted in promotions that it gets movies from three studios -- 20th Century Fox, Universal Pictures and Warner Bros. -- 28 days earlier than Neflix and Redbox.

Nonetheless, Blockbuster's financial situation remains dire as it is severely short on cash and unable to invest in growth. As of July 4 it had $64.3 million in cash and $920.4 million of debt.

Almost $600 million of that debt is senior secured notes for which an interest payment was due Aug. 13. The company convinced 70% of the holders of that debt to extend an interest forbearance agreement until Sept. 30.

Blockbuster also has $300 million worth of senior subordinated notes for which an interest payment is due Sept. 1. The company said there is a "substantial likelihood that such payment will not be made as scheduled," adding to the pressure on it to reach a recapitalization agreement as soon as possible.

In a statement, Blockbuster Chief Executive Jim Keyes said, "Our objective is to complete a recapitalization as soon as possible so we are better positioned to focus our attention and resources on the strategic opportunities to continue our business transformation."

Blockbuster stock, which last month was delisted by the New York Stock Exchange because of its ongoing low price and moved to the "pink sheets" over-the-counter market, was trading down 4 cents midday Friday at 14 cents.

[Updated at 2:07 p.m.: At the end of trading Friday, Blockbuster stock was down 4.5 cents, or 25%, to 13.5 cents.]

-- Ben Fritz

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