Blockbuster hires law firm to handle refinancing

Wed, 03/04/2009 - 7:05am
Michael Liedtke, AP Business Writer

SAN FRANCISCO (AP) – In the latest sign of retail trouble, Blockbuster Inc. said Tuesday it has brought in an outside law firm to rescue the long-slumping video store chain from a financial bind.

The hiring of corporate restructuring specialists Kirkland & Ellis spurred speculation that Blockbuster is on the verge of becoming the latest merchant to be waylaid by the worst recession since the early 1980s.

But Blockbuster spokesman Karen Raskopf said the Dallas-based company has no plans to seek bankruptcy protection, refuting media reports that quoted unnamed people saying Kirkland & Ellis was exploring a possible bankruptcy filing.

The rebuttal reversed a steep decline in Blockbuster shares. The shares recovered 13 cents to 35 cents in Tuesday's extended electronic trading, after plunging 74 cents to finish the regular session at 22 cents.

Blockbuster is hoping Kirkland & Ellis can re-negotiate the terms of its outstanding loans and arrange adequate financing to keep the 7,500-store chain afloat during an economic downturn that is now widely expected to last through the rest of this year.

The company has been leaning heavily on a $400 million revolving line of credit scheduled to expire in August.

As of Oct. 5, Blockbuster had just $35 million available on the credit line. Raskopf declined to update that figure Tuesday, saying the company will detail its financial situation March 19 when it releases its fourth-quarter results.

The credit crunch is just the last challenge to confront Blockbuster, which has sustained more than $4 billion in losses since 2001 as it struggled to adapt to alternative movie rental options that deliver entertainment through the mail, cable and satellite TV services, and high-speed Internet connections.

Besides diminishing the need to travel to Blockbuster's stores, the new rivals also have eroded the revenue that the company used to collect for charging for late returns of rented movies.

Netflix Inc., which pioneered the concept of renting DVDs through the mail, has been one of Blockbuster's biggest headaches. In sharp contrast to Blockbuster's scramble for survival, Netflix is becoming even more popular as more cash-strapped households look for cheaper forms of entertainment.

Netflix has signed up more than 1.3 million new customers in the past five months, catapulting its service beyond 10 million subscribers. The Los Gatos-based company charges $9 to $17 per month for its most popular rental plans.

The growth helped Netflix earn $83 million on revenue of $1.36 billion last year. Excluding the payment of preferred dividends, Blockbuster lost $14 million on revenue of $3.9 billion during the first nine months of last year.

Blockbuster CEO James Keyes, who formerly ran 7-Eleven convenience stores, has been trying to engineer a turnaround by transforming the video rental stories into entertainment hubs that sell a variety of merchandise.

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