News broke this week that South Korea Telecom is interested in buying Blockbuster, with insiders telling many agencies and one report running in Reuters. Our take on the move last month by creditors to offer $290 million for the carcass of Blockbuster, was that it was just a way of kicking off the auction. It’s what is known as a stalking horse bid, and is really a guideline of how much the creditors are willing to accept, despite being owed around $1 billion. Blockbuster has every element that you need to build a Netflix rival, both inside the US and out, it’s just that it also comes with 9,000 retailer shops as well.
Reuters quoted an unnamed source confirming that SK Telecom is considering investing in the bankrupt US video rental chain, but also saying that at any point in time it is looking at many opportunities overseas. In its own country SK Telecom has a standoff for dominance within Korea with Korea Telecom and LG Telecom, and the market is more or less saturated in both the fixed and wireless business, so it makes sense to look enviously at markets like the US, which still have some growth in them, but most sensibly that would be for another operator. In the past Korean operators have been linked to acquisitions of stock in US operators such as Clearwire.
It is likely that the SK Telecom executive thought he was far enough away from the auction that his comments wouldn’t reach the news pages, and just because other bidders have not yet leaked, it doesn’t mean the interest is not there.
We believe that Blockbuster could be acquired for as little as the bid the creditors have put in, $290 million, or as much as $1 billion. The company still has revenues of $3 billion, but much of that would have to go if it was to rein in its retail footprint and become a mainly online player.
Reuters said that an auction for the Blockbuster assets will happen next week and from this a new owner will emerge. Most likely the court’s help will be needed to eliminate many of the real estate and employee commitments that the company has if its new owner wants to begin life as a mainly online business, and we would expect the company to be split into three portions, a continuing retail operation, an online service and the assets which just cannot be sold.
The fact that someone as far out of the core business as SK Telecom find itself mentioned in connection with Blockbuster shows how many companies, of varying types, might be already lining up for the bidding. The richer the new owner, the more money that creditors might expect from a restructuring of the company’s assets and SK Telecom is certainly cash rich.
Blockbuster has already run up $250 million of debtor in possession debt, which is where the company takes goods but they remain the property of the supplier until paid for, any value lower than this bare bones offer might scare off suppliers.
The court would want over $1 billion so all debt gets paid off, but won’t get it, so Blockbuster must therefore be worth somewhere between the two figures, $290 million and $1 billion.
If we look at the value attached to Sonic Solutions when Rovi acquired it a few weeks back, we see that it was sold for $720 million, and that this had an online only video store, and didn’t have thousands of store property leases around its neck, as Blockbuster has. Sonic also had a couple of perfectly good other businesses including its DVD manufacturing business and the recently acquired DivX, which provided around 80% plus of its revenue. So if you believe it was bought to help Rovi’s offerings to become Netflix-like, that was a huge premium on what was about $16 million of revenue per year out of a run rate of around $100 million.