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Blockbuster Inc., the Dallas-based company that has been called a dinosaur since man invented digital downloads, says it's not headed to the courthouse yet despite warning investors recently that bankruptcy was a possibility.
In an interview Wednesday, chief executive Jim Keyes insisted the nation's largest movie rental chain has other options to pursue before it lands in Chapter 11 reorganization.
"We're not Circuit City," Keyes said.
The comparison to the failed consumer electronics chain is one that Keyes knows well – Blockbuster offered to buy Circuit City before it went under.
Blockbuster continues to generate cash, but it's facing a cash crunch soon and needs to restructure its almost $1 billion debt. That obligation dates to a dividend it was required to pay in 2004 as part of its split from Viacom Inc.
The company is trying to sell its European operations to pay down debt, wants to lower its interest expense by refinancing and is working with Hollywood studios for more favorable terms in how it pays for DVDs. The European stores account for about 20 percent of its worldwide total.
Keyes is an optimist who is sure that an evolving Blockbuster can be viable because of its brand equity, digital on-demand movies on multiple devices, DVDs-by-mail, fewer stores and more vending machines. But it must reduce its burdensome debt load.
"An out-of-court solution is in the best interest of our studio partners, employees, bondholders, equity holders and landlords," Keyes said. "We're trying to restructure our debt in a challenging financial marketplace."
Fitch lowered Blockbuster's credit ratings on Wednesday and said that if the company can't restructure its debt, the probability of a default or bankruptcy is "very high." In September, Blockbuster sold $652.5 million of its debt to high-risk investors who demanded 11.75 percent interest through 2014.
Keyes thinks the company can do better now. It might ask those investors to exchange all or part of the debt for common stock. In February, Blockbuster hired Rothschild Inc. as its financing and strategy adviser. The company's secured bondholders hired Houlihan Lokey.
After the market closed Tuesday, Blockbuster filed its annual report with the Securities and Exchange Commission. Investors responded Wednesday to its risky, ongoing prospects by sending shares down 12 cents, or 29 percent, to close at 28 cents.
The company's revenue plunged last year, dropping to $4 billion from $5 billion in 2008 in part because it had closed 400 stores in the U.S. and sold its chain in Ireland. Its market capitalization – the price of its stock multiplied by the number of outstanding shares – fell to $34 million. At its peak in 2002, the company's market cap was $5 billion.
If movie studios change terms and require Blockbuster to pay in cash for its DVDs instead of on credit, that would be "a tough situation for it to overcome," Keyes said.
Blockbuster is in negotiations with top Hollywood studios to maintain or improve existing credit terms by pledging its 459 Canadian stores as collateral, the company said.
"We are currently experiencing significant liquidity constraints," the filing said. "Should we not be able to generate sufficient cash flow from operations, and should the studios tighten or eliminate credit terms, we may determine that it is in the company's best interests to voluntarily seek relief through a pre-packaged, pre-arranged or other type of filing under Chapter 11 of the U.S. Bankruptcy Code."
Keyes will need more than optimism to reverse sales declines at the company that has been dependent on brick-and-mortar stores for many years.
This year, Blockbuster expects sales to fall in the mid- to high single digits.
Still, Blockbuster remains a key outlet for the movie industry. It has an exclusive agreement with Warner Bros. that gives it a 28-day head start over its competitors for such hits as The Blind Side and Sherlock Holmes. Blockbuster and other brick-and-mortar stores are the only places to rent those movies for the first four weeks after they are released on DVD.
But studios continue to experiment on their own as consumer use of online video services doubled from 2008 to 2009, according to Dallas-based Parks Associates, which predicts revenue from premium video rentals and downloads in the U.S. will grow from about $2.3 billion in 2010 to $8.4 billion in 2014.
Hollywood's biggest film studios and the largest U.S. cable systems are joining in a $30 million marketing effort to build consumer awareness of on-demand movie rentals as DVD sales decline, Bloomberg News reported Wednesday.
One analyst who closely follows Blockbuster says it has enough cash to get through most of this year, but that it simply can't afford another year of poor sales.
"Even though Blockbuster is not yet in liquidity crunch, it could be if the poor results of the fourth fiscal quarter are repeated in 2010," said Kim Noland, director of high yield research at Gimme Credit.
Blockbuster reported a loss of $434.9 million in the fourth quarter. Most of that was due to the company's writing down its value as it continued to lose market share to Netflix, kiosk operator Redbox, and free and paid digital programming on the Internet.
It will close at least 500 U.S. stores this year as it opens kiosks to compete with Redbox. Through a partnership with NCR Corp., the company will have 10,000 Blockbuster Express rental kiosks positioned nationwide by year's end.
More video stores are closing.
In January, Blockbuster's largest store competitor, Movie Gallery Inc., filed for bankruptcy for the second time since 2007. Movie Gallery also owns Hollywood Video and plans to close 805 stores – about a third of its total.
If Blockbuster were to file bankruptcy, consumers might see fewer new releases on its shelves and more store closings as it sought court approval to renegotiate its finances. It had about 5,200 stores worldwide in January, excluding franchised stores. About 3,500 of those are in the U.S.
"It may not be possible to turn Blockbuster's business around," Noland wrote. "While its high-yield issuance last fall appeared to buy it some time, its recent negative revision in guidance and the inroads into its business by competitors bode very ill for its long-term health."
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