Dish’s $320 Million Blockbuster Buy May Mean More Store Closings, Analysts Say

Dish Network’s proposed $320 million buy of bankrupt Blockbuster could mean more store closings as the satellite service focuses on the chain’s Internet business, analysts said. But Dish seems prepared to try to salvage some of Blockbuster’s 1,717 stores as a channel for sales of its service. A hearing on the proposed sale is scheduled for Thursday in Bankruptcy Court in New York City. Dish expects to close the deal in Q2.

Emerging early Wednesday as the winning bidder, Dish topped a $310 million bid by investor Carl Icahn and $308.6 million offered by Cobalt Video. Cobalt, led by the Monarch Alternative Capital hedge fund, had filed a $290 million “stalking horse” bid that set the auction price floor. South Korea’s SK Telecom dropped out before the final bidding, and Gordon Brothers Group/Hilco Merchant Resources didn’t make an expected joint offer. Dish’s bid includes $228 million cash, which will go toward paying off creditors including Icahn and other bondholders as well as movie studios, owed more than $1 billion total.

"With its more than 1,700 store locations, a highly recognizable brand and multiple methods of delivery, Blockbuster will complement our existing video offerings while presenting cross-marketing and service extension opportunities for Dish Network,” said Thomas Cullen, a Dish Network vice president.

A Dish spokesman declined to say how Dish will carry out a cross-marketing strategy with Blockbuster while court approval of the sale is awaited. The deal furthers Dish Network CEO Charles Ergen’s goal of expanding beyond the satellite video business, Sanford Bernstein analyst Craig Moffett said. Dish recently paid $1 billion to acquire bankrupt MSS/ancillary terrestrial component licensee DBSD North America, which owned 20 MHz of valuable mobile satellite spectrum. One-time Dish affiliate EchoStar, of which Ergen is chairman, proposed buying Hughes Communications for $1.3 billion.

"We find it difficult to imagine Blockbuster’s rapidly shrinking store base becoming a source of significant incremental gross additions for the core Dish Network pay TV service,” Moffett said. Dish may use Blockbuster’s OnDemand business to bolster a streaming service, but many of its subscribers use DSL-based broadband “ill-suited” to a “quality streaming video experience,” he said. Blockbuster OnDemand has found a place on many Internet-connected TVs and Blu-ray players.

Dish’s buy of Blockbuster will expand its content library and give it a new Internet-based way to attract subscribers at a “manageable cost,” said Wells Fargo senior analyst Marci Ryvicker. “We believe this is one more ‘hint’ that Charlie Ergen is setting up Dish to provide (some) content via server/Internet versus satellite,” she said. He’s trying to fortify his business against “the long term risk of competitive foreclosure that the satellite TV business faces by virtue of its antiquated point-to-multipoint delivery infrastructure,” Moffett said. “Whether or not having Blockbuster under the Dish Network umbrella really does anything to help seems uncertain at best."

In the lead-up to the auction, several creditors protested how much money they would receive from a sale. Universal Music Group Distribution and Millennium Media Services’ First Look Studios were listed as receiving “cure” amounts of zero in court documents. Universal claimed in court documents that it was owed $503,123 under a revenue-sharing arrangement begun in 2008, $486,078 from sales through Blockbuster stores and $17,045 from online sales. Millennium was owed $189,366. Rovi, which agreed in December to include Blockbuster OnDemand in its TotalGuide interactive program guide, claimed it was owed $247,747 under a data-supply agreement signed in April 2010.

Dish also presumably stands to inherit a brand-licensing deal with NCR, which runs about 9,000 Blockbuster Express video rental kiosks. Dish officials declined to comment. But NCR is “looking forward to continuing our relationship with them,” an NCR spokesman said. saying the Blockbuster brand is “still one of the top names in consumer entertainment.” NCR recently slashed the number of kiosks it plans to add this year to 3,000 from 7,800 in 2010. The company is moving 1,600 kiosks the next two to four quarters, parting ways with some retailers as it tries to increase density in some markets (CED March 11 p2). NCR ended 2010 with 8,000 kiosks, short of its goal of 10,000, after holding back deployments to “better understand the issues that impact location selection,” John Bruno, executive vice president for industry solutions, told analysts in a recent conference call.

Since filing for bankruptcy, Blockbuster moved to close 700 stores and has struggled. The fiscal 2010 net loss decreased to $295 million from $560 million, partly from a decline in goodwill and asset-impairment charges to $19.6 million from $369.2 million, Blockbuster said Monday in an SEC filing. Operating expense dropped to $1.9 billion from $2.5 billion amid store closings. Gross profit narrowed to $1.8 billion from $2.2 billion. Revenue fell to $3.2 billion from $4.1 billion. Blockbuster should get a short-term boost from eliminating debt, but falling revenue will produce “significant pressure” and there is “tremendous risk in operating Blockbuster as a ‘going concern,'” Moffett said.