Blockbuster’s announcement that it has secured new agreements with major studios that offer enhanced payment terms in exchange for a first lien on the company’s Canadian assets sent its stock trading slightly higher. But are Blockbuster’s efforts to restructure outside of Chapter 11 bankruptcy bound for failure or success? Blockbuster’s CEO Tom Casey is hoping he can help the company survive outside of bankruptcy by creating separate agreements with the movie studios that will give the company a competitive advantage.
Since most of its business is renting new releases, Blockbuster can’t function without studio terms that put plenty of copies to rent and sell on its shelves. The Warner Bros. agreement gave it an advantage over Netflix Inc. and Redbox by letting Blockbuster rent The Blind Side and Sherlock Holmes exclusively for the first four weeks the hits were on DVD.
Studio support is a key part of Blockbuster’s overall recapitalization effort. These contracts affirm “our strong and collaborative business relations with these critical vendors,” said Tom Casey, Blockbuster’s chief financial officer.
But securing exclusive studio agreements hasn’t been Blockbuster’s only move to avoid bankruptcy and steer the company into the black. The company has already closed many stores and has a plan to cut costs by $200 million this year in an effort to preserve cash and stop losses. And while these efforts to avoid bankruptcy are honorable, what Blockbuster really needs is a major restructuring of its debt load that is swift and efficient; but it is doubtful (although not impossible) that it can be successful outside of bankruptcy. Blockbuster is currently struggling under nearly $1 billion in debt and is paying out $100 million in interest payments alone. If the company filed Chapter 11 bankruptcy it would have more leverage to negotiate settlements on their debt and would automatically be better positioned to compete in the fast changing video rental market place.