(By Salman - iStockAnalyst Writer)
Trading in the shares of Blockbuster (NYSE: BBI) was halted on Tuesday following reports that the world’s largest movie-rental chain is exploring the possibility of bankruptcy filing and has hired legal counsel to evaluate restructuring options.
Shares of the company had plunged over 76% before the trading was suspended.
According to reports, the Dallas, Texas based company has asked Kirkland & Ellis LLP to evaluate among various options, a “pre-packaged” or “pre-arranged bankruptcy,” in which much of the restructuring work is completed out of court, the person said. A pre-packaged filing is different from a pre-arranged bankruptcy as it includes agreements from creditors about the outcome of the company’s reorganization.
The company refused to comment on the story.
Blockbuster, which has more than 7,500 stores in North America, Europe, Asia and Australia, had been struggling amid increased competition from Netflix Inc. (NASDAQ: NFLX), the largest US movie-rental service via mail. Blockbuster’s higher fixed costs and relatively high prices had made it difficult for it to compete with Netflix.
Earlier, experts had raised concerns about the highly leveraged structure of the company and had questioned its ability to refinance two credit lines expiring in August.
Blockbuster was scheduled to report earnings early next month.
In a bid to increase subscriber base, the company had been experimenting with new products and had recently started selling a set-top box that plays digital downloads from Blockbuster.com to play on TVs. In January, Blockbuster had struck a deal with technology firms such as Sonic Solutions (NASDAQ: SNIC) and had announced that it will launch a pilot program during the second quarter that will allow its customers to rent both movies and video games as part of a monthly subscription plan.
Americans, hit hard by mounting layoffs and deepening recession, are seen shifting to cheaper form of entertainment. Netflix has weathered the economic downturn pretty well and continues to grow from strength to strength. In February, the company passed the 10-million-subscriber mark, adding 600,000 new members since January 1 alone. The company is confident of that its subscriber base would hit 11.3 million subscribers by the end of the year. In its most recent quarterly earnings, the company beat Wall Street estimates by wide margins. In January, the company had reported a 58% rise in earnings and a 19% gain in revenue. The company stands to gain further if Blockbuster files for bankruptcy.
Shares of Netflix jumped $2.03 or 5.91% to close at $36.38. Shares of the company have nearly doubled since late November.
Disclosure: Author does not own any of the stocks discussed here.
