Lots of drama at Blockbuster__»

November 17, 2008

Over the past 23 years, Blockbuster, Inc. (BBI) has made a lot of money by renting and selling Hollywood dramas. But the financial drama that the company is involved in now is surely one that its executives, employees and investors would rather not see.

The 10-Q filed last Friday noted that the stock is trading at a historic low (it’s at $0.96 a share at the moment) and said that if the price per share doesn—t increase soon, the company may have to recognize a non-cash impairment charge.

Blockbuster is trying to re-invent itself on several fronts. It’s got its own movies-by-mail program (to try and keep Netflix (NFLX) from getting all the business from those of us who think that driving to a store is so 20th century). And since the summer, it has been testing the —Blockbuster store of tomorrow in the Dallas-Ft. Worth area to see how consumers respond to features like a children’s media zone where kids can play while their parents browse for movies. There’s also a lounge with flat screen TVs, free Wi-Fi, and a gaming center where customers can test games and gaming systems on a 62-inch television.

But it takes money to make those extensive renovations, and that’s the problem. The credit freeze is still on, and — in Blockbuster’s words – —The recent extraordinary and unexpected limitations in domestic and international capital and credit markets have significantly limited the availability and raised the cost of debt and equity financing.

Blockbuster said that it’s too early to tell whether it will be able to obtain credit on acceptable terms when the credit market finally thaws a bit. In the meantime, it is taking —prudent actions to conserve the cash on hand and monitor expenses. It is also considering whether it should sell and/or license some of its international operations.

The scariest part, though, may come from what happens if the credit thaw doesn—t happen within a reasonable time frame. The Q says:

—Our ability to obtain future financing or to sell assets to provide additional funding could be adversely affected because a very large majority of our assets have been secured as collateral under the credit agreement—. If we are required to fund our business and operations without outside capital, we will have to significantly reduce our spending and limit certain operational and strategic initiatives. These scenarios could materially adversely impact our liquidity and results of operations.

Hopefully this is one drama that will be over soon and leave us with a happy ending.

Image source: Blockbuster

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