Business Bankruptcy

Blockbuster Inc., has again warned of a possible Chapter 11 bankruptcy filing if it is unable to turn its business around.  In an annual report it filed recently, Blockbuster said that it was concerned that it would not be able to continue without filing bankruptcy due to declining sales and a lack of sufficient cash flow. In an effort to correct the situation and avoid filing Chapter 11 bankruptcy, the movie rental company has begun setting up movie rental kiosks similar to those operated by Redbox, but it is not yet clear if this will be enough to compete in the toughing movie rental market.

With its growth efforts constrained by debt and declining cash flow, Blockbuster is closing hundreds of underperforming stores, including 500 to 545 this year, and has outlined $200 million in fresh cost cuts tied to staffing and advertising spending. Since last year, it has pursued options for overseas assets, selling its business in Ireland in August for up to $45 million in cash, but it so far has been unable to close deals on other divestitures.

Blockbuster said Tuesday that it also seeks to boost its balance sheet, including modifying terms of its senior notes and the possible swap of senior subordinated debt with Class A common stock. The exchange could be implemented in late second quarter or early third quarter, but some of potential moves may require the company to file a pre-packaged or other filing under Chapter 11 bankruptcy-protection laws, Blockbuster said.

Chapter 11 bankruptcy may be just what Blockbuster needs to get its debt under control and restructure its business in way that would allow it to effectively compete.  With liabilities that are more than $314.3 million than its assets, Blockbuster could really benefit from filing Chapter 11 bankruptcy. Bankruptcy could reduce Blockbuster’s debt significantly, free it from burdensome employee contracts and give it the necessary leverage to renegotiate agreements with vendors.  And finally, Chapter 11 bankruptcy could allow the movie rental giant to once again gain dominance over emerging players such as Redbox and Netflix.

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