Associated Press, Published September 23 2010
Debt, changing media habits topple BlockbusterNEW YORK (AP) — Blockbuster Inc., once the dominant movie rental company in the U.S., filed for Chapter 11 bankruptcy protection on Thursday, after reeling from mounting losses, rising debt and competitors that have better catered to Americans' changed media habits.
Blockbuster will continue to operate its 3,000 U.S. stores. But the move, long expected, marks the end of an era that Blockbuster and its gold-and-blue torn ticket logo helped establish — of Americans visiting video-store chains for the latest movie-rental releases. Increasingly, Americans are forgoing Blockbuster and watching movies via video subscription services like Netflix Inc., video on demand and vending machine services such as Coinstar Inc.'s Redbox.
In a submission to the U.S. Bankruptcy Court in the Southern District of New York on Thursday, the company said it reached an agreement with bondholders on a recapitalization plan. Under the plan, bondholders will exchange nearly $1 billion in debt for equity in a reorganized Blockbuster. The company has received commitments for $125 million in "debtor-in-possession" financing from senior noteholders to repay customers, suppliers and employees during the reorganization.
"After a careful and thorough analysis, we determined that the process announced today provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future as we continue to transform our business model," said CEO Jim Keyes.
Blockbuster, founded in 1985 by a Dallas software entrepreneur, was once a home entertainment powerhouse. It helped popularize videotape recorders and took off in 1987 after Waste Management Inc. founder Wayne Huizenga took control and began aggressively expanding and buying up competitors.
But Blockbuster has been losing money and market share for years as Netflix, Redbox and other services gained popularity. Netflix subscribers have grown from 1 million in 2002 to 15 million in 2010. Redbox, meanwhile, operated 26,900 kiosks as of the end of June. Wedbush Securities analyst Michael Pachter predicts that number will exceed 28,000 by the end of September.
In response, Blockbuster ended late fees and started online and kiosk services of its own. But it was unable to keep its debt in check.
Blockbuster, based in Dallas, earlier this year said it would close hundreds of stores and said it was struggling with liquidity problems. It had warned investors it might file for bankruptcy protection and was delisted in early July by the New York Stock Exchange.
Hollywood Video parent Movie Gallery Inc., once the second-largest U.S. movie rental chain behind Blockbuster, also fell victim to changing movie-watching habits and filed for bankruptcy protection in February — it's second trip through bankruptcy court. It liquidated in August.
Movie rentals aren't the only retail segment that has been disrupted by changing ways to consume media. Amazon.com has challenged traditional booksellers like Borders Inc. and Barnes & Noble Inc. and iTunes helped lead to the end of many record and CD stores.
Blockbuster said Thursday it plans to keep its 3,000 U.S. stores open while it evaluates them. Digital and mail businesses will all continue to operate normally. Operations outside the U.S. and domestic and international franchisees are not part of the Chapter 11 reorganization. Blockbuster's U.S. DVD vending kiosks, owned and operated by NCR Corp., are also not part of the reorganization and will continue to operate normally.
Billionaire investor Carl Icahn will help steer the latest efforts to save Blockbuster, reviving a role he played previously in trying to shape up the company. He has thrust himself into position of power, this time by snapping up about one-third of Blockbuster's highest-priority debt, according to a report published Wednesday in The Wall Street Journal.
Blockbuster said in its filing it had about $1 billion in assets and $1.46 billion in debt.
Blockbuster's largest creditors include the Bank of New York Mellon, Twentieth Century Fox Home Entertainment, Warner Home Video Inc., Sony Pictures Home Entertainment, The Walt Disney Co., Universal Studios Home Entertainment and other movie studios.
Copyright 2010 The Associated Press.