Blockbuster files Chapter 11 bankruptcy exit plan

After nearly three decades in business during which its name was synonymous with video rentals, Blockbuster Inc. is hitting the rewind button.

The retail giant filed a long-expected Chapter 11 bankruptcy reorganization plan Thursday that will allow it to wipe out nearly $1 billion in debt that has hobbled its ability to compete. In August, Blockbuster told the Hollywood studios that it would shut down 500 to 800 of its 3,306 U.S. stores as part of its bankruptcy.

Under the plan filed in U.S. Bankruptcy Court in New York, the owners of $630 million of Blockbuster’s senior secured debt would exchange their bonds for full ownership of the company. The owners of an additional $300 million in unsecured debt would see their claims wiped out, as would those who own the company’s virtually worthless stock, which closed Thursday at 4 cents a share.

Its largest single shareholder would be Carl Icahn, the activist investor who has a long history with Blockbuster and is also the largest shareholder in Lions Gate Entertainment Corp. Icahn has recently been buying up Blockbuster’s debt and currently owns about a third of the secured bonds, according to a person familiar with the matter.

Blockbuster is betting that by eliminating debt payments and canceling the leases on its worst-performing stores, it can return to profitability as a smaller, more focused venture.

“Once they get their costs in line and focus on the profitable stores, there’s a strong play here,” said Larry Nussbaum, the managing director of private equity firm Vertex Capital, which acquires and turns around distressed companies. “The Blockbuster brand still has value.”

The company received approval Thursday of its “first day motions” so that it can keep stores open and continue paying employees and its movie studio suppliers.

Blockbuster dominated VHS and DVD rentals and was a strong player in sales throughout the 1990s and early 2000s, but failed to respond quickly to the rise of DVD-by-mail subscription service Netflix and, more recently, $1-per-night kiosk company Redbox. Although it eventually launched competing similar ventures, it has been a distant second in both businesses.

In addition, Blockbuster was saddled with nearly $1billion in debt as part of its spinoff from former corporate owner Viacom Inc. in 2004. Interest payments became onerous, particularly as the economy fell into recession and customers cut back on spending.

Since the start of 2008, Blockbuster’s losses have totaled $1.1 billion.

In February, the company enlisted a financial advisory firm to help it fix its deteriorating financial situation. Blockbuster considered numerous options, including negotiations with two potential buyers, before finally settling on the Chapter 11 plan over the summer, according to an affidavit filed by Jeffrey Stegenga, the company’s chief restructuring officer.

Stegenga testified that with its debt largely eliminated, the company would be able to implement its long-term strategy, “which provides for Blockbuster to differentiate itself as the only operator that provides access across multiple delivery channels.” In addition to marketing its presence in retail, mail, kiosks and online, Blockbuster will emphasize that unlike Netflix and Redbox, it offers DVDs from several studios including Warner Bros., 20th Century Fox and Universal Pictures the same day they go on sale.

The studios have been largely supportive of Blockbuster’s efforts to turn itself around, according to people close to the matter, in hopes that it will remain a viable competitor to Redbox and Netflix, as well as a force in DVD sales.

Five studios — Warner, 20th Century Fox, Universal, Sony Pictures and Paramount Pictures — serve on an ad hoc committee that has been helping with the bankruptcy process. Simon Swart, executive vice president of Fox Home Entertainment, said in a statement that his company’s “longstanding relationship with Blockbuster has been mutually beneficial and profitable, and will continue to be so.”

Although they have been supporting Blockbuster, some studios have also been constraining the amount of credit they advance the company because of its financial woes, Stegenga said. Most of Blockbusters’ deals to acquire DVDs from studios are short-term and will expire by Dec. 31.

A court filing says the company currently owes $21.6 million to 20th Century Fox, $20 million to Warner Bros., $13.3 million to Sony Pictures, $8.6 million to Walt Disney Studios, $8.3 million to Universal Studios and $7.9 million to Lions Gate.

Those taking the biggest bet on Blockbuster’s future are the senior debt owners led by Icahn. In addition to converting their bonds to equity, they are extending the company a credit line of up to $125 million so it can remain in business during the bankruptcy process. They are also offering additional credit of up to $50 million when it exits bankruptcy.

The reorganization plan calls for Icahn to select two of seven members of the company’s board of directors once it exits bankruptcy. In addition, he and investment firm Monarch Alternative Capital, another large debt owner, will select a third member jointly.

ben.fritz@latimes.com