Opposition Emerging to Blockbuster’s Bankruptcy Reorganization Plan

As Blockbuster prepares to file a bankruptcy reorganization plan next week, sharp opposition is emerging to investor Carl Icahn and a group of hedge funds gaining control of the chain. Under the current plan that’s scheduled to be filed by Jan. 14, the company would wipe away most of its $1 billion in debt and give equity to secured bondholders. Most of Blockbuster’s $665 million in secured bonds is held by the Icahn Group. Unsecured bondholders, who owned more than $300 million worth of bonds, and shareholders would get nothing under the proposed plan.

An ad hoc committee of 35 individual shareholders is considering an investment in Blockbuster and is seeking data on its push into digital. The information being sought includes details of Blockbuster’s financial relationships with Best Buy, Comcast, Google, Verizon, Samsung and others, according to court documents. The shareholders own about 28 million of Blockbuster’s 147 million shares. At issue is the value of the chain, with the shareholders arguing Blockbuster is worth “considerably more” than $1.2 billion value set by debtors. Blockbuster recently signed agreements with partners to distribute movies digitally, and NCR has deployed 10,000 Blockbuster Express DVD rental kiosks under a licensing agreement.

One of the debtholders, Lyme Regis Partners, which owns more than $570,000 of Blockbuster’s 9 percent senior unsecured notes, filed a little-noticed complaint with the bankruptcy court seeking to have Icahn’s debt holdings “recharacterized” as equity. Icahn’s “entrenched relationships” with Blockbuster CEO James Keyes and two board members gives him a “distinct advantage” over other creditors, Lyme Regis said.

Icahn, whose ties to Blockbuster date from 2004 when he bought 26 million shares in the chain after it split off from Viacom, benefitted from “insider information” about the chain’s plight, Lyme Regis said. Having secured two board seats following a proxy battle in 2005, Icahn had inside knowledge of the chain’s finances and “dumped” equity interests in the company in April 2010, well in advance of Blockbuster’s September bankruptcy filing, Lyme Regis said.

Icahn, who resigned from Blockbuster’s board in January 2010, bought the majority of the chain’s 11.75 percent senior secured notes in 2010 “at a price well below their face value,” Lyme Regis said. The notes, which mature in October 2014, were required to be redeemed four times in 2010 at 3.33 percent of their $675 million value, Lyme Regis said. About $498 million of the notes were due within two years and eight months of their being issued in 2009, Lyme Regis said. It said Keyes, Chief Financial Officer Thomas Casey and General Counsel Eric Peterson got bonuses in December 2009 totaling $850,000 for completing the senior secured note offering.

The senior secured notes “provided Mr. Icahn and his affiliates a vehicle to take over the company for a fraction of its value, to the detriment of the senior secured noteholders, including Lyme Regis,” the complaint said. Icahn also was part of the forbearance agreements Blockbuster struck in July and August and provided a portion of the chain’s $125 million debtor-in-possession financing, Lyme Regis said. Blockbuster officials weren’t immediately available for comment. Icahn’s inside knowledge of Blockbuster’s strategies and operations “resulted in injury to other creditors” and gave him “an unfair advantage” in deciding the chain’s fate, Lyme Regis said.

Meanwhile, Blockbuster has closed 58 stores since filing for bankruptcy protection in September and will shutter another 180 in the first half of 2011, according to court documents. While the locations of the stores that will close wasn’t disclosed, Blockbuster filed a notice last fall asking the court to reject unexpired leases. Eighteen of the leases expired Dec. 31, including those in Altamonte, Boynton Beach, Casselbury, Deltona, Kissimmee, Jacksonville Beach, Spring Hill, West Palm Beach and Weston, Fla. Four other leases expired Nov. 30, court documents said. The longest-term agreement, for a store in Okmulgee, Okla., runs until Nov. 30, 2017.