All Blockbuster U.S. Stores Remain Open ... For Now, It Says

All 3,000 of Blockbuster’s U.S. stores will remain open for now, it said Thursday after filing for Chapter 11 bankruptcy protection. The filing at U.S. Bankruptcy Court in New York was part of a deal with bondholders to recapitalize the ailing company by converting senior debt into equity, it said.

Although existing U.S. stores are still open, Blockbuster said that, “as part of the recapitalization process,” it “will evaluate its U.S. store portfolio with a view towards enhancing the overall profitability of its store operations” -- a signal that at least some store closings are likely to come. “It’s anyone’s guess how many stores” will close, Wedbush Morgan Securities analyst Michael Pachter told us. But he predicted “750 or so” will close “over the next several months."

"The biggest drag on their earnings the last few years was the loss of customers to Netflix first, and to Redbox most recently,” said Pachter. Netflix and Redbox rent new releases for an average of $2 per rental, while Blockbuster’s average is more than $3, and that “price disadvantage was impossible to overcome,” he said. Netflix and Redbox can “offer low prices because they have low fixed costs” without a traditional brick-and-mortar presence, he said. He predicted Blockbuster “will emerge from bankruptcy,” but questioned “its long-term prospects.” The company must find “an equilibrium level that keeps enough stores open to satisfy demand for their offering and pricing, while maintaining profitability,” he said. Blockbuster can be “more profitable by selectively closing marginally profitable stores … and driving even a small part of the traffic to other stores,” he said.

All of Blockbuster’s U.S. operations, including DVD vending kiosks, and by-mail and digital businesses, remain in operation for now, and the company is “fulfilling all orders as usual,” it said. The company will also continue honoring its rewards program, valid coupons, gift cards and other customer programs, it said. Blockbuster’s non-U.S. operations and its franchisees are not included to the Chapter 11 proceedings. Franchise locations in the U.S. and abroad will also continue operating as usual, it said. The Blockbuster Express vending kiosks, owned and operated via a pact with NCR, continue operating in retail locations across the U.S., Blockbuster said. Its operations in Canada, Denmark, Italy, Mexico and the U.K. are also “conducting business as usual,” but the company will stop funding its operations in Argentina that it said “experienced continued shortfalls in operating cash flow."

The one-time video rental giant warned early this year that it might have to file for Chapter 11. Its stock was delisted from the New York Stock Exchange about two months ago. Bondholders gave the company some breathing room in July, postponing a $42.1 million payment deadline as Blockbuster scrambled to restructure its balance sheet (CED July 6 p4).

Under the recapitalization plan announced Thursday, Blockbuster said it “would substantially reduce its debt,” from about $1 billion to an estimated $100 million or less. The company secured a commitment of $125 million in new debtor-in-possession (DIP) financing from the senior noteholders to help meet its obligations to customers, suppliers and employees during the recapitalization process, it said. The bondholders agreeing to the deal hold about 80.1 percent principal amount of the company’s 11-3/4 percent senior secured notes, Blockbuster said. The senior secured notes will be exchanged for the equity of a reorganized Blockbuster, it said. The only debt expected to remain on its balance sheet upon emergence from Chapter 11 will be the amounts drawn under the $125 million DIP financing, which will convert to an exit loan facility upon consummation of the plan and a new exit revolving credit facility of up to $50 million, it said.

The deal “provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future” as the company continues shifting its business model “to meet the evolving preferences of our customers,” said CEO Jim Keyes.