This page has been archived and commenting is disabled.
Blockbuster Goes to Hollywood?
The risks To
Blockbuster are well publicized today. The company is fighting off
competitors on all fronts with Netflix, Redbox, and OnDemand steadily
eroding share from brick and mortar competitors. But Blockbuster’s
senior subordinated notes maturing May 2012 are trading below twenty
five cents on the dollar today. Investors with an above-average level
of risk tolerance may want to give these bonds a closer look. If
management can simply execute on its strategic plan, investors stand to
make a substantial profit in a very short amount of time. We note that
the days of Blockbuster Domination are clearly over, but investors only
need a few quarters of stabilization and a briefly extended survival
timeline to earn outsized returns.
Downside
appears limited from here. The company recently made an important
interest payment to bond holders during the first quarter – BBI’s
largest seasonal drain on cash. Quarters two and three are generally
cash neutral while the fourth quarter, which includes the important
holiday season, is the largest generator of cash. The company appears
to have cleared their biggest near term hurdle, especially when one
considers recent deals with major studios for new payment terms which
reduce working capital, freeing up additional cash flow.
Upside is
substantial when one stops to consider the potential for positive
surprises:
- Roughly one third of domestic stores generate more than three
quarters of cash flow (see company illustration below). With store
leases on average one to two years (according to management), rapidly
closing stores should leave a very profitable core store base. - New releases represent almost two thirds of revenues. Recent deals
with major studios provide Blockbuster with a “monopoly” on new releases
giving the company an exclusive rental window and a head start over
nimble competitors. Studios want Blockbuster to survive. - Hollywood Video bankruptcy eliminates the largest competitor in the
industry. Reduced capacity through thousands of store closings
(Hollywood and local video retailers) will ultimately bring supply back
in line with demand. Take a look at same store comps at Best Buy in an
ex-Circuit City world. - Blockbuster’s strong brand and brand
awareness provide a key competitive advantage. Management should
be successful in leveraging these assets across various forms of
distribution – by mail, kiosks and electronically.
- Source: Company presentation, slide 9
We stress the word should only
because it is not apparent that shareholders have the right team on the
bus today. We appreciate the tremendous value in this franchise, but
question management’s ability or incentive to unlock this value.
Blockbuster CEO, James Keyes, is saying all the right things. But he’s
been saying all the right things for years now. Jim, if you’re
listening, we’d offer up the following words of advice first – “Well
done is better than well said.”
It’s pretty clear that this old boy’s
club may need a fresh set of eyes on the inside. Or better yet, a fresh
pair of shoes, to “walk the walk” since they seem to have no problem
“talking the talk.” We didn’t get a chance to ask him when we spoke
yesterday, but I’m guessing our new friend Gregory Meyer is walking
around in some pretty comfortable running shoes. We urge interested
investors to take a look at Greg’s recent letter to stockholders and his
original letter to the Blockbuster Board of Directors in 2005. And
Jim, if you’re still listening, we’d urge you and your Board to
carefully consider what Greg might have to offer. The guy did hand you
Redbox on a silver platter five years ago . . . he just might know a
thing or two.
Disclosure: At the time of
publication, the author was long Blockbuster Senior Subordinated notes,
although positions may change at any time.
»
- advertisements -
Downside is really limited, it can only go down another $0.25 (!) A dying brand is not = strong brand (as others noted).
If Senior/Sub debt is trading ~ $0.25 recently, where does that leave the Senior debt being priced (approximations are welcome)? And if the corporate restructures, who sits on the creditor committee pulling the strings...senior noteholders.
I do think BBI can recover. They need to get their streaming situation settled and they could be back on top. WMT bought a company called VUDU that does streaming Blu-Ray quality videos on the same day they are released. As broadband speeds pick up, you could see this model pick up speed.
In the meantime, I used to be a loyal Netflix subscriber until last month when they announced all these 30-day embargoes, plus the availability of Blu-Rays are always "Very Long Wait". No thanks, I'll just visit my local video rental store.
What's That Business Plan Again?
From a circa 2002 visit... haven't been back since...
1. Get in my car, go to their retail location staffed by teenagers and one former Radio Shack "Ass-istant Manager."
2. Look through racks of sticky cases pawed over by nose picking adolescents.
3. Stand in line with oblivious parents, obnoxious kids and gum smacking stick-like tweens with make up.
4. Be laughably offered candy at theater prices while I stand in the incompetently long line.
5. And the real profit center... charge me late fees when BB says it is not back on time.
Die Already
Blockbuster is the ultimate outdated worst of all possible business plans. Yeah, rent me a vhs...I want that prime downtown location for a restaurant venture...
I'd imagine liquidation value-- which would take a while to realize in any event-- and seniority of bonds would put their value close to zero.
Wayne Huizenga! Where are you?
This article couldn't be more wrong. Renting videos at a store is a dead business model. It's business will continue to decline, occasionally forestalled by suckers willing to invest more cash. Downloading rental movies is the future. And if you want to buy a video or game, WalMart, Target, Best Buy, etc have an insurmountable competitive advantage. Blockbuster equity and subordinated debt should be viewed as worthless, the senior debt might be worth 5 cents on a liquidation of physical assets and the real estate. Maybe not even that once you pay the lawyers to wind this thing down.
What utter garbage! BBI is a zero. JUST LET IT DIE!
The team has already proven it can't execute for shit. Why bother?
I'm a serious photographer. I'm currently doing a series on recently closed BB stores in my area (SF bay area). I don't suffer from a shortage of subjects, that's for sure.
Wow, ZH is now pimping out penny stocks?
sorry, don't know what I'm doing.
Yeah, apparently. I didn't know they allowed, like advertising, on blogs; but then I don't know anything about this blog. It's really a weird thing to scan, like is somebody actually going to take this seriously ? If they could actualize their plan; yeah sure. Just make electronic video illegal and cancel the internet/ I don't see why there should be any problem. Blockbuster is like the Parrot in the Monty Python skit; it's not on vacation, it's not taking a nap, it's dead. Done. Finished.
Blockbuster near my house is closing down end of month.
DVD's at $3.99 for sale. Blu-Ray for 6.99.
Kalki