The Reality of the Sale of Blockbuster
Kyle D. Bement, March 5th 2011
As an employee, frequently under-informed and misled as to the actual state of the company, I had to independently research exactly what had gone on after Blockbuster announced “aggressive” plans to auction itself off. The articles published seem to suffer from either too much information and large swaths of data or an oversimplified version of a rather complex story. Attempting to distill essential information for dissemination to co-workers, management and others whose livelihoods are threatened by the backroom deals already in motion, it is important to meet halfway.
Blockbuster, Inc., headquartered in the Renaissance Tower in Dallas, TX, has suffered from “failure to catch on”. Blockbuster Online was introduced after NetFlix had saturated the by-mail rental service. The Blockbuster Express boxes arrived after RedBox had already taken a predominate share of the market. Clearly, these missteps negatively impacted the state of financials. That’s not research or trade secret; it’s observable and logical fact.
We’ve all been hearing the death rattles for a substantial period of time, but it wasn’t until recently that predictions became reality. Back on September 22nd, 2010, it was announced that Blockbuster, Inc. was in the works with its creditors to file for Chapter 11 bankruptcy. Under the plan, it would shutter roughly 1,000 stores and refocus its attention on digital distribution. At that time, the company was crippled by $900 million dollars in debt.
The senior debt holders that were owed some $630 million would, under this plan, convert their debt into ownership shares in the restructured Blockbuster. The other $300 million, owed to minor companies, was effectively erased. Bondholders, who purchased swaths of this debt at a substantial rate of interest, floated a $125 million loan to the corporation to ensure its continued operation while under the protection of the bankruptcy court (Spector).
On February 22nd, 2011, Blockbuster announced that it was planning to auction itself off after a disagreement with creditors about exiting Chapter 11 bankruptcy. Initially, the company estimated it would be sold for about $300 million (USA Today). As previously mentioned, the company is at least $630 million in debt. These debtors have recently asked that the Chapter 11 proceedings be converted into a Chapter 7 liquidation. In a motion filed on March 1st, 2011, these unsecured creditors petitioned the court to halt the sale, that they referred to as being “‘designed for the exclusive benefit’ of Blockbuster potential buyers and would result in ‘devastation’ for unsecured creditors owed some $486 million” (Morath).
The plan, as it stands, would grant special rights and privileges to a group led by current debt-holders, Monarch Alternative Capital LP, Owl Creek Asset Management LP, Stonehill Capital Management LLC and Varde Partners Inc. These include the ability to control who receives sale proceeds. This would, conveniently, allow the money to be returned to the debt holders (the companies mentioned above) while landlords and vendors may receive little or no compensation for goods and services provided after the bankruptcy proceedings. Additionally, under this plan the purchasers would be allowed to convert from Chapter 11 bankruptcy to Chapter 7 liquidation, effectively extending the time Blockbuster would be legally allowed to hold going-out-of-business-sales (Morath). Unsecured creditors claim that the $125 million loan is “illusory,” a ruse intended to keep landlords, studios and creditors to continue to supply goods and services to the company (Kary).
On March 2nd, 2011, Bankruptcy Judge Burton Lifland in Manhattan adjourned the hearing after these creditors agreed to a standstill on opposition to the sale process. Judge Lifland is quoted as saying, “[This is] the most aggressive [sales plan] I have seen in 35 years on the bench. If anything is going to fly, this garbage truck had better sprout wings” (Kary). Recently, to combat Blockbuster’s aggressive sales plan, movie studios have formed a committee to represent their interests. As of March 5th, 2011, this committee included Sony Pictures, Walt Disney Co., Universal Studios Home Entertainment and Twentieth Century Fox, who have said in court filings that Blockbuster has refused to pay for merchandise received since the bankruptcy filings of September. As it stands, Blockbuster owes $5.5 million dollars to Sony Pictures (McLaughlin).
The crux of the problem is referred to by Summit, an independent movie production and distribution house, as “administratively insolvent,” unable to pay the costs associated with its bankruptcy. As it stands, the petition lists total assets of $1.02 billion against a debt of $1.47 billion. In addition, creditors and Blockbuster itself estimates it owes an addition $57 million (McLaughlin).
Bibliography
Beaudette, Marie. "Creditors Blast Blockbuster Sale." 3 March 2011. Wall Street Journal. 5 March 2011
Kary, Tiffany. "Blockbuster Judge Calls Sale Proposal ‘Aggressive’." 2 March 2011. Bloomberg Business Week. 5 March 2011
McLaughlin, David. "Sony Joins Companies Saying Blockbuster Isn't Paying Them for Merchandise." 4 March 2011. Bloomberg. 5 March 2011
Morath, Eric. "Blockbuster Creditors Seek To Halt Sale, Call For Liquidation." 1 March 2011. Dow Jones. 5 March 2011
Spector, Mike. "Blockbuster Reel Nears End On Its Bankruptcy Filing." 22 September 2010. Wall Street Journal. 5 March 2011
USA Today. "Blockbuster Plans To Put Itself Up For Sale." 11 February 2011. Asheville Citizen-Times. 5 March 2011
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