Thursday, September 23, 2010

Blockbuster enters Chapter 11 bankruptcy

As expected for months, Blockbuster has entered Chapter 11 bankruptcy in the U.S., and its equivalent in several other countries. Blockbuster says that its 3,000 U.S. stores will continue to operate as usual during the bankruptcy (but that's probably not true--see below). In addition, its video kiosk business is owned by NCR and isn't part of the bankruptcy.

Blockbuster has asked the Bankruptcy Court to allow it to give the movie studios and distributors that supply it with 80% of its revenues priority for repayment, so that they don't cut off the company's ongoing supply of content. Senior bondholders, including Carl Icahn, who bought approximately one-third of the company's bonds as of September 17th, will be compensated with common stock after the company is reorganized and will effectively own the company. Other creditors and shareholders, with the exception of the movie studios and distributors, will be wiped out by the bankruptcy.

Blockbuster will most likely use the bankruptcy to cancel the leases, layoff the employees and close many of its more poorly-performing stores. It will also use the bankruptcy to renegotiate leases for other locations, and possibly lower or eliminate some benefits and pensions. The company's hope is that by wiping out its debt and lowering its operating costs, it will be able to compete more effectively with Netflix and Redbox. However, given how far behind those two companies it is, it's hard to see how Blockbuster can catch up.
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