Blockbuster said to be planning a bankruptcy filing

After dominating the home video rental business for more than a decade and struggling to survive in recent years against upstarts Netflix and Redbox, Blockbuster Inc. is preparing to file for bankruptcy protection next month, according to people who have been briefed on the matter.

Executives from Blockbuster and its senior debt holders last week held meetings with the six major movie studios to discuss their intention to enter a “preplanned” bankruptcy in mid-September, said several people familiar with the situation who requested anonymity, citing the sensitivity of ongoing talks.

Blockbuster is hoping to use its time in Chapter 11 to restructure a crippling debt load of nearly $1 billion and escape leases on 500 or more of its 3,425 stores in the U.S. Maintaining the support of Hollywood’s film studios during the process will be crucial so that Blockbuster can continue to rely on an uninterrupted supply of new DVDs.

Blockbuster has lost $1.1 billion since the beginning of 2008 and has been severely hamstrung in efforts to expand its business because of interest payments on $920 million in debt. This month the company announced that most of its debt holders had agreed to a forbearance on interest payments until Sept. 30, allowing it to attempt a recapitalization.

Last week Dallas-based Blockbuster’s chief executive, Jim Keyes, came to Los Angeles to hold individual meetings with executives at studios including 20th Century Fox, Paramount Pictures, Sony Pictures, Universal Pictures and Warner Bros. He was joined by restructuring consultants hired to help turn around the struggling company, along with its senior debt holders who would be likely to end up owning a substantial portion of Blockbuster after the restructuring.

Former Sony Pictures home entertainment President Ben Feingold, who is serving as an advisor to the debt holders, was present as well.

Though plans are not set in stone, people knowledgeable about the discussions said the Blockbuster representatives presented a mid-September bankruptcy as the most likely scenario. The company would enter what is known as a preplanned bankruptcy, meaning most but not all creditors would be on board ahead of time, including senior debt holders and content suppliers.

One of the primary goals of the bankruptcy process, which the company said it hoped would last about five months, would be to escape costly leases for some of its worst-performing stores, people close to the situation said. Though Blockbuster hasn’t decided exactly how many locations it would seek to shutter as part of a bankruptcy, executives told the major studios it was looking at 500 to 800.

Blockbuster closed nearly 1,000 stores in the last year alone, a reflection of consumers’ rapidly declining interest in renting DVDs from retail locations now that they can rent them from ubiquitous kiosks in grocery stores, in the mail or via the Internet.

If it successfully exits bankruptcy, Blockbuster has told Hollywood studios that it hopes to grow through non-retail initiatives. Kiosk manufacturer NCR Corp., for instance, has already deployed about 6,000 Blockbuster-branded kiosks that, like Redbox, rent DVDs for $1 a night.

The company also hopes to expand its presence in the digital distribution, through which a growing number of customers are downloading or streaming movies on computers, Internet-connected televisions and mobile phones.

Most studios are believed to be supportive of Blockbuster’s efforts, as they want to see it remain in business as a viable competitor to Netflix and Redbox, particularly because Movie Gallery Inc., parent of the formerly second-largest DVD rental retailer Hollywood Video, recently went out of business.

But there are still some issues to be resolved, including the company’s desire to continue offering movies from all the studios the same day they go on sale. Fox, Universal and Warner have all instituted a 28-day window on rentals through Redbox and Netflix.

The studios would probably be protected from any significant losses on payments Blockbuster might owe them at the time it files for bankruptcy protection under the proposed plan. However, they would lose revenue from any stores shut down.

The parties most affected would be Blockbuster’s junior debt holders and the landlords on leases that would be canceled under the proposed bankruptcy. It remains to be seen whether they would attempt to challenge a plan that would leave them with a fraction of what they are owed.

If the company does not enter bankruptcy protection, it would need to find a new investor or persuade its debt owners to significantly reduce its interest payments for the foreseeable future.

A Blockbuster spokeswoman declined to comment on the studio meetings. In a statement, she said, “The extension of our forbearance agreement is a strong sign of support from our senior secured noteholders as we work toward putting in place a more appropriate capital structure to support Blockbuster’s long-term growth.... Our discussions continue to be productive and we have every reason to believe we will come out of the recapitalization process financially stronger and more competitively positioned for the future.”

Blockbuster stock, which last month was delisted by the New York Stock Exchange because of its ongoing low price and moved to the over-the-counter market, closed Thursday at 11 cents. The company’s total market value is $24 million.

It had been acquired in 1994 by now-former owner Viacom Inc. for $8.4 billion.

ben.fritz@latimes.com