Blockbuster to yell "Action!" on pre-packaged bankruptcy?

Blockbuster Video, the ubiquitous blue-and-yellow beacon of home video rental, is rumored to be finally pushing play on a long-rumored bankruptcy.

It has been reported by several industry sources and the LA Times that Blockbuster CEO Jim Keyes has been paying visits to Hollywood honchos with several golf carts full of restructuring consultants and senior secured-debt holders to discuss the status of his business and its more-than-likely pre-assembled bankruptcy. Blockbuster relies heavily on studio partnerships to provide new releases of big-budget movies. Access to these films is what has been keeping Blockbuster relevant, despite the rise of online rental companies like NetFlix, a model Blockbuster has been trying to emulate.

It would be hard to argue that at some point, the studios couldn’t find a way to handle the second primary channel of consumer product distribution on their own. After all, direct-to-video films have also been growing, as have smaller “independent” features (most of which are still backed by big studios) that get to living room plasmas much quicker than films picked for nationwide releases. That means that major studio players already recognize that they have a direct pipeline to our televisions and may no longer need the profit detour created by companies like Blockbuster.

In an article on Dallasnews.com (the city in which Blockbuster is based), a company spokesperson would not confirm the nature of the Hollywood meetings.

“We continue to explore all of our options and are making good progress in our recapitalization process," said Patty Sullivan. "Our discussions with the studios and bondholders continue to be productive and we have every reason to believe we will come out ... financially stronger and more competitively positioned for the future."

As you might recall from the “too big to fail” bankruptcies of companies like Chrysler and General Motors, a pre-packaged bankruptcy involves creating an entire plan for the business before officially filing, with approval from all stakeholders, to encourage a rapid court approval process and spend as little time as possible deliberating the status of the company. The time spent in bankruptcy then becomes really nothing more than another item on a checklist of “to-dos” to get the company back on its feet. Many believe this will soon become the standard for most business bankruptcies.

In fact, proposed legislation for the Consumer Protection Agency includes line items about an official form of government-assisted bankruptcy for companies that could be branded with the “too big to fail” moniker.

Blockbuster’s primary debt holders claim $675 million in secured notes and would most likely own a solid portion of the company after bankruptcy. Shareholders and unsecured note holders would have a significantly smaller portion.

That small portion potential is not sitting well with a specific group of investors who own more than 25 percent of the company. It is typical for individual shareholders to lose their stake in bankruptcy plans arranged before court. As as a result, the group in question is prepared to file suit to maintain their ownership position in the company.

Expecting an out-of-court settlement because of previous actions by the company, shareholder Niko Celentano is not pleased by the rumors of a pre-planned bankruptcy. A lawsuit, he said, “could be our only recourse.”

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