As we were putting together this issue a number of stories appeared that seemed to suggest that Blockbuster was at death’s door and that any day now the company might shut up shop. That view is far from the truth and the words that appeared on recent company filings are really just legalese to make sure that no shareholders sue if the company fails to close a deal (which is so far advanced that it has been announced) for $250 million of revolving debt.
We might venture to say that this was boilerplate text for a company that is in the throes of replacing its existing revolving credit facility with a $250 million revolving credit facility which will push off maturity from this Summer to September 30, 2010 on its existing revolving debt.
Yes it could fold if this debt was not put into place, but no-one in their right mind is going to lend a business $250 million if it was about to close its doors the following day. And if the deal is NOT done, we would expect it to continue to trade from the safety of Chapter XI.
Certainly Blockbuster made a $374 million net loss, on revenues of $5,288 million in its last annual filings, but it then listed a huge amount of change which is going on at Blockbuster to get it in a better position to compete with Netflix, and launch into businesses it is more confident of.
One lingering doubt we must express is that one of the ‘recovery’ legs that it is relying on, especially in Europe, is turning its stores into places where games and devices can be rented or bought, just at a time when the big gaming players are beginning to move towards online distribution and even online game play. In other worlds the shift to online has already gone on in film, causing Blockbuster a problem, and now it is about to begin facing the same problem in games.
On its latest filing the company said, ‘We have the intent and ability to take actions necessary for the Company to continue as a going concern’ and the statement went on to discuss the current expiry dates in April and August of loan agreements which led it to approach existing and new lenders for the $250 million facility. It has a few trading conditions to meet, but reckons it will pass all of them with flying colors and concludes that if this goes wrong, it may not have adequate liquidity.
But it also lists all the actions that it has taken of late, which collectively look like Blockbuster is going through a very energetic transition under its new management. It has increased in-stock availability on Blu-ray releases; outfitted 600 stores in new livery to freshen up its tired look and emphasize gaming, beverages and snacks and video-enabled electronic devices; is now selling consumer electronics in 1,900 of its US stores; it has just begun selling concert tickets exclusively for Live Nation Ticketing; and has the 2Wire MediaPoint digital media player, for its on-demand video service in-store as well as testing digital delivery through kiosks to portable devices.
Blockbuster also reckons that it has cut overheads by more than $100 million and is pursuing cost cuts through outsourcing, lease renegotiations and redundancies.
Those lease negotiations should be quite interesting, and for some landlords the idea of having Blockbuster enter Chapter XI must be a nightmare, especially any with multiple property relationships with Blockbuster. In the US Blockbuster has 3,878 company operated stores and 707 franchises. Outside the US this is 1,938 company operated stores and 892 franchisee stores.
The company is also relying more and more on revenue-sharing arrangements instead of outright purchasing on films and games, with a rise to 85% of its total domestic movie rental units in 2008, and to 65% of games.
“The completion of the amendment (to the revolving debt) is an important milestone for Blockbuster,” stated Jim Keyes, Blockbuster Chairman and CEO. “We believe the amount that will be available under this extended facility, combined with our cash flow from operations and our cost saving initiatives, will provide the company with adequate liquidity to manage through the challenging macro economic environment and constrained capital markets.’
Blockbuster said it believes that it will be in a position to close the amended credit facility by May 11.
In March the company frightened investors off by hiring a US law firm to look at its restructuring options, hiring law firm Kirkland & Ellis to advise it with respect to its ongoing financing and capital raising initiatives. Kirkland & Ellis is understood to be a specialist in US bankruptcy laws.
In February Blockbuster launched a service to combine the benefits of online purchasing of games as well as movies, with what Blockbuster calls Total Access. Online customers rent video games, as well as movies and get them through the mail as part of their subscription plan.
Blockbuster was burning cash at $100 million a quarter operationally and before this restructuring had under $100 million in the bank. The stock value has moved up since we last wrote about he company, but essentially it is still valued at a trivial amount for a $5 billion company.