Blockbuster Inc. has only a matter of months to rearrange its debt and turnaround its shrinking video-rental business or it will be forced to file for bankruptcy protection.
The Dallas-based company has warned investors for the second year in a row that it may have to file for U.S.Chapter 11 bankruptcy protection in the face of declining sales and rising competition.
"It's unlikely we will be in the same position a year from now," Tom Casey, the chief financial officer and executive vice-president, said in an interview. "It's months or a few quarters. Certainly we have a number of alternatives that we are working on that we are pleased with."
Blockbuster is a victim of a massive inheritance of debt from its former parent company, new technology that is revolutionizing the market and its own sluggish strategy to counter the onslaught of new forms of competition in recent years.
“ When we look at alternatives for capital raising, Canada is a candidate for using its collateral to provide financing. ”— Tom Casey, Blockbuster chief financial officer and executive vice-president
Weakening financials and growing competition "raise substantial doubt about our ability to continue as a going concern," Blockbuster said in a filing with U.S. regulators late Tuesday. It used similar language a year earlier.
The company said it may try to strengthen its balance sheet by converting senior debt into common stock, thereby diluting current shareholders' holdings.
It also raised the possibility of using its Canadian assets as collateral on payments to the movie studios for its DVDs.
Blockbuster's Canadian operations remain debt-free and are one of the assets at the disposal of the parent company, Mr. Casey said. "When we look at alternatives for capital raising, Canada is a candidate for using its collateral to provide financing."
Blockbuster has a market value Wednesday of just $78-million (U.S.). The shares plummeted 29 per cent to 28 cents on the New York Stock Exchange yesterday. Five years ago they traded around $10.
Blockbuster has been losing business to a number of challengers, including Netflix Inc., which sells movie rental subscriptions in the U.S. by mail and online, and Coinstar Inc.'s Redbox, which rents films for $1 a night from vending machines located in U.S. grocery stores.
In addition, cable and satellite TV companies are offering on-demand movie services and Apple Inc. is selling movies and TV programs online.
Blockbuster has tried to replicate these business models without significant success to date. Its major rivals boast far more online subscribers and rental kiosks.
But Mr. Casey said he thinks Blockbuster is "uniquely positioned" to combine all the emerging movie distribution platforms under one brand.
The market, however, remains largely doubtful that the management team can pull things around at this late stage.
In one indication of how marginalized Blockbuster has become, shares of Netflix inched up just a fraction of a per cent Wednesday, rising 29 cents to $70.92 on the Nasdaq stock exchange, on the news of a possible bankruptcy filing by its rival.
California-based Netflix has been growing by nearly 20 per cent annually over the last few years and posted profit of $679.7-million last year on sales of $1.67-billion. In contrast, Blockbuster sales fell 20 per cent last year to $4.1-billion. Losses increased to $558.2-million, up from $374.1-million.
The company closed several hundred of its 6,500 stores last year as it moved to boost its online and kiosk-based sales. It reported a $300-million reduction in expenses last year and is targeting another $200-million in cuts this year.
But the belt-tightening may not be enough. Blockbusters' liabilities exceeded assets by $314-million at the end of the year. Part of the company's problems today stem from its former parent's decision to spin off the video-rental business.
Media giant Viacom Inc. shed its majority stake in Blockbuster in 2004, but not before Blockbuster committed to a special, one-time dividend payment of more than $900-million, a payout that saddled the video rental company with massive debt.
As of Jan. 3, the company reported debt of $975-million, almost half of which is due within three years or less. Last October it managed to rearrange some of its financing with a $675-million bond deal that offered a yield of 11.75 per cent.
On average, Blockbuster's same-store revenue decreased 13 per cent last year due to increased competition and lower store traffic.
The company owns and operates 459 stores in Canada, where sales fell to $399.1-million in 2009, down 17 per cent from $482.7-million a year earlier. Video-on-demand from cable and telecom companies has been largely responsible for that drop, Mr. Casey said.
And although Netflix doesn't operate in Canada, privately held Zip.ca Inc. operates a similar online subscription mail-order service here.
COMMENTARY: I can remember going back three or four years, when Blockbuster's CEO said that he did not believe NetFlix present a serious competitive problem. Flash foward to 2010 and NetFlix is profitable and stronger than ever. About two years ago, Coinstar, began installing its RedBox movie kiosks at numerous food and drug store chains throughout the country, These two companies have chipped away at Blockbuster's market share and now the company is in serious jeopardy of going out-of-business judging from its balance sheet (debts exceed assets by 2-to-1).
I stated early last year, that I felt Blockbuster's days were numbered given the competition from NetFlix and RedBox and the shift from DVD to online movie streaming and downloads. It is a pity that Blockbuster's management did not see this coming and reacted to these threats and technological shifts a lot sooner. Had they consolidated a lot sooner, and developed their own online movie streaming service a lot sooner, they might not have placed themselves in such a dangerous situation.
I have been where Blockbuster is, and I just do not see any other option except bankruptcy and liquidating the company. Converting debt into stock is going to be of little good this late in the game, because this will not solve the technological shift that has occured and continue to impact their business.
Courtesy of an article dated March 19, 2010 appearing in The Globe and Mail
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