Blockbuster's proposed bankruptcy sale is uncomfortable reminder for Borders
The proposed bankruptcy sale of video-rental chain Blockbuster serves as an uncomfortable reminder of the perilous restructuring route Ann Arbor-based Borders Group Inc. has to navigate.
Blockbuster faces the same problem Borders faces: an outdated business model.
Photo courtesy of Blockbuster Inc.
If the sale goes through, those debtholders, which include private equity firms and hedge funds, will have the right to force Blockbuster to transition into a Chapter 7 liquidation, WSJ reported.
That possibility mirrors a similar fear that Borders, which filed for Chapter 11 bankruptcy protection Feb. 16, may not be able to identify a profitable business model of its own.
If Borders can't convince the bankruptcy judge and its major creditors to agree on a proposal to save the company, liquidation becomes a serious option. The company's filing could be converted into a Chapter 7 liquidation or even a liquidation of the company's assets under Chapter 11.
For now, Borders is simply closing 200 of its 500 superstores — while keeping 140 small-format locations open — and planning to renegotiate leases and cut debt with the court's protection. Those moves will allow the company to exit unprofitable leases.
The comparisons between Blockbuster and Borders are many. Blockbuster is suffering because it clung to an outdated business model, while competitors — namely Netflix — capitalized on the emergence of rent-by-mail and video-streaming segments.
Borders is suffering for a variety of reasons, including its failure to establish a strong online sales operation and a slow embrace of electronic books.
Meanwhile, both companies are stuck with a network of physical stores that consumers are progressively abandoning.
A sale of Borders is considered a possible outcome in the company's bankruptcy proceedings. Section 363 of U.S. bankruptcy code allows valuable assets to be packaged together so that they can be sold to an outside firm or emerge as a new company.
In that scenario, the old assets would stay in bankruptcy and be liquidated. This is what happened during General Motors’ 2009 bankruptcy filing, for example.
Possible suitors for Borders may include private equity companies or hedge funds with a high tolerance for a restructuring effort. Rival Barnes & Noble may also be interested in swooping in to pick up Borders' most enticing assets.
Under that scenario, though, it seems unlikely that Barnes & Noble would be interested in keeping Borders' Ann Arbor headquarters, which employs about 550 workers.
"My experience is when companies strategically merge in bankruptcy, they don't need two headquarters," University of Michigan bankruptcy law professor John Pottow said recently.
For now, Borders has 120 days to propose its own plan to reorganize the company, which include closing an additional 75 to 136 stores, according to bankruptcy documents. The next court hearings in the company's bankruptcy case are scheduled for March 15.
Chapter 11 bankruptcy is probably the only hope for Borders and Blockbuster to get their balance sheets and store footprint into line with market realities.
But it doesn't mean liquidation is out of the question.
Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.
Comments
Wolf's Bane
Wed, Feb 23, 2011 : 2:15 p.m.
Maybe U of m can lease space up on Plymouth after Blockbuster closes? Netflix will probably be next if they don't expand their online rental and download operations. Renting via snail mail films will go away of the Dodo in about... now.
G. Orwell
Wed, Feb 23, 2011 : 1:30 p.m.
I think Nathan Borney has it wrong. The $290 million was the initial bid. If the bankruptcy court approves, the bid will be opened up to other bidders. Which means that it could go higher. I also do not think the $290 million bidders will force Blockbuster into chapter 7. If that happens, the bidder, who are also the debt holders, will get much less than $290 million. It makes no sence to buy the company and force it into chapter 7. Liquidating Blockbuster will not yield much money since BB does not have much assets. Blockbuster, after eliminating the interest payment on the $1.0 billion debt and closing unprofitable stores, is actually profitable. They were profitable during the past five months. They have also formed many partnerships that could be very beneficial. Since Blockbuster has a 28 day lead over other DVD distributors, it provides a huge advantage for distribution. This article by Nathan is very poorly written.
15crown00
Wed, Feb 23, 2011 : 5:55 a.m.
bad things to come for B&B.I smell liquidation
Borbsi
Wed, Feb 23, 2011 : 4:57 a.m.
Yeahh! No more fees for not rewinding.
CynicA2
Wed, Feb 23, 2011 : 4:48 a.m.
Liquidation is the most likely outcome, as far as I can see - Borders has lots of liabilities and few tangible assets other than the name itself. Trying to make the "Titanic" smaller after it hits the iceberg doesn't make it any less likely to sink. Standby for some great deals on bookshelves and chairs!
Kai Petainen
Wed, Feb 23, 2011 : 4:05 a.m.
blockbluster at plymouth road closes this week
David Vande Bunte
Tue, Feb 22, 2011 : 10:29 p.m.
If Blockbuster had been 3 years earlier on their DVD by mail service, they probably could have put Netflix out of business. They had a nice perk that Netflix couldn't match...if you brought your mailed DVD back to a local Blockbuster store, you could exchange it for a free DVD rental while you waited for your next mailed one. So instead of getting just your mailed movies, you also got all kinds of freebies from the stores themselves. Netflix couldn't even come close to touching that. As a current Netflix subscriber and former Blockbuster subscriber, in my opinion, Blockbuster totally blew it by being late to the party. By the time they figured it out, Netflix already had them beat.
Huh?
Tue, Feb 22, 2011 : 10:29 p.m.
I dont think we really need this company around, with all the other movie rental possiblities out there, Plus they dont have an 18 and over section anymore, so really, whats the big deal? LONG LIVE NETFLIX
Macabre Sunset
Tue, Feb 22, 2011 : 9:35 p.m.
Can't this just be summed up by saying if you have an outdated business model, you're going to wind up in liquidation? Blockbuster became big by charging too much for movie rentals. Someone found a way to compete by harnessing the power of the Internet. Borders charges too much for books. Someone found a way to compete.