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BLOCKBUSTER VIDEO GOES FOR BANKRUPTCY FOR RELIEF
By: Paul Goldberg, Staff Writer - 03-17-10 - 11:30 a.m. PDT
Blockbuster Video (BBI) warns that bankruptcy might be looming and that has investors nervous. They are worried about the value of their stock but restructuring the mega retail giant could ultimately be a smart move for the company.
The video rental store declared in a Securities and Exchange Commission filing yesterday Tuesday March 16th, that it might be forced to file Chapter 11 if cash flows don't improve. Plus they will not be able to restructure their debt which is looming around $1 billion dollars.
"These factors raise substantial doubt about our ability to continue as a going concern," Blockbuster said in the filing.
As a result of the announcement, Blockbuster shares are taking a major hit. They are down 26.1% to about 29 cents in morning trading, with investors fearing that a Chapter 11 filing would render common shares worthless.
One still has to remember that a voluntary bankruptcy, while painful, may be its only way out, Needham analyst Charles Wolf stated.
Blockbuster's competitor Movie Gallery has been having major financial difficulties as well and has been forced to shut down hundreds of their retail outlets.
Sources say little confidence is in the air right now that Blockbuster will be able to recover on its own. Last month the video rental company reported a fourth-quarter loss of $434.9 million, or $2.24 a share, as same-store sales fell almost 16%.
But no one can say Blockbuster isn't trying. Over the past several years, the company has shuttered under performing stores, cut costs and rolled out kiosks in an effort to compete with Netflix (NFLX) and Coinstar's (CSTR) Redbox.
"There's a role for physical stores to play in video distribution," Wolf says. "And Blockbuster's plan to close under performing stores is spot on."
Plus earlier this week, Blockbuster Video stated that it is in talks to divest its European unit and the company has also stated that it will reduce their costs by $ 200 million dollars before the end of the year.
No matter what Blockbuster does, there will always have investors looking at the debt and interest burden, which was caused by the special dividend Blockbuster was forced to pay when it was spun out of Viacom (VIA) back in 2004.
"A voluntary Chapter 11 would enable Blockbuster to reduce its debt burden and interest payments to manageable levels."
"We want to implement its strategy for closing under performing stores and building a digital distribution business," Wolf says. "I can see why management is contemplating it."
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