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Blockbuster creditors seize auction initiative from bankruptcy court

Would you buy Blockbuster? Well what if you had lent money to Blockbuster? Would you buy it then? We said it before, and we’ll say it again, inside th

By PETER WHITE

Published: 24 February, 2011

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Would you buy Blockbuster? Well what if you had lent money to Blockbuster? Would you buy it then? We said it before, and we’ll say it again, inside the Blockbuster business is a Netflix waiting to get out. All it needs is a way of taking the business out of its retail footprint and it has the film rights, the DVD stockpile, the brand and the technology to challenge Netflix. It’s just that no-one, except the companies that have already allowed it to borrow money, believe in Blockbuster right now.

So a group of them – have formed a new company to bid for Blockbuster, called Cobalt Video Holdco, formed by funds managed by Monarch Alternative Capital, Owl Creek Asset Management, Stonehill Capital Management and Värde Partners, each of which is a secured noteholder of Blockbuster.

But it’s not a conventional bid and there’s two ways of viewing it. The first is that these companies would like to buy Blockbuster and run it until it looks more like Netflix, and starts to have that kind of immense consumer appeal, and then they would like to sell it. They want to do the deal before Blockbuster runs out of cash, and want to offer as little as possible. So they have come up with a scheme whereby they offer $290 million, and unless another bidder comes forward a deal can be done. This way instead of the court feeling that it has to get back more of the $1 billion plus of debt that the company has run up, it feels that a decaying asset has to be sold quickly to the highest bidder. So perhaps this consortium wants to be the highest bidder. We don’t think so.

That brings us to the other alternative. This group of lenders wants their money back and the only way they can see it happening is if the court is forced to sell the company off quickly, by using this “Stalking horse” approach, which is meant to be the first bid, and trigger higher bids. It relies on just what we have said about the company – that some of the Netlfix sheen needs to rub off on it.

Given that Blockbuster has already run up $250 million of debtor in possession debt, which is where the company takes goods but they remain the property of the supplier until paid for, any value lower than this bare bones offer might scare suppliers.

The court would want over $1 billion so all debt gets paid off, but won’t get it, so Blockbuster must therefore be worth somewhere between the two figures, $290 million and $1 billion.

If we look at the value attached to Sonic Solutions when Rovi acquired it a few weeks back, we see that it was sold for $720 million, and that this had an online only video store, and didn’t have thousands of store property leases around its neck, as Blockbuster has. Sonic also had a couple of perfectly good other businesses including its DVD manufacturing business and the recently acquired DivX, which provided around 80% plus of its revenue. So if you believe it was bought to help Rovi’s offerings to become Netflix-like, that was a huge premium on what was about $16 million of revenue per year out of a run rate of around $100 million.

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