More Trouble for Struggling Video Rental Chain Blockbuster

Blockbuster (BBI), its stock driven down to 34 cents by high debt and falling earnings, may have finally run through its nine lives. Several media reports say that the company's talks with creditors have stalled.

One group of creditors has proposed decreasing Blockbuster's debt by $300 million in exchange for control of the movie rental chain. But according toThe Wall Street Journal, "Those discussions have bogged down of late, as the two sides debate how much new money Blockbuster needs to fund its business. The bondholders have proposed investing around $30 million, but Blockbuster wants $100 million." For a company with Blockbuster's losses, the difference in the amounts could be crucial. In the meantime, the company is also discussing options with other bond holders.

The Blockbuster 10-Q shows just how much trouble the company faces. Its revenue in the period ending Apr. 4 fell to $939 million, from $1.086 billion in the same period a year ago. It posted a loss of $67 million, compared to a profit of $25 million in the first quarter of 2009. Blockbuster's cash position was $109 million, but that amount has almost certainly fallen over the last two months. Blockbuster's long-term debt and its current portion of long-term debt are about $1.2 billion.

Blockbuster's cash trouble is so bad that several studios have considered holding back DVDs because of the financial risk of doing business with the company.

Blockbuster's remaining 4,914 stores continue to be the albatross around the firm's neck. The company has tried to diversify into mail-rental DVDs and kiosk based sales, but other companies have substantial leads in these businesses.

While creditors don't want to see Blockbuster file for Chapter 11, it may be the only way out for the company. A bankruptcy would probably allow it to decrease its debts and walk away from some store leases. It would almost certainly mean that the company would not be publicly traded.

One alternative remains, especially if a bankruptcy occurs. The company could be broken into a "bad" Blockbuster which holds retail stores and a "new" Blockbuster which holds kiosk, DVD by mail, and video-on-demand assets. Over time, the "bad" unit would close stores and lay-off employees while the "good" company would try to come from behind to catch up with its mail-rental and kiosk-based rivals.