Blockbuster goes bust

Once dominant in the US market, video and game rental chain Blockbuster has been under siege in recent years by online streaming, mail-order, and kiosk competitors like Netflix and Redbox. The company's slide was underscored today, as it filed for Chapter 11 bankruptcy.

In announcing the bankruptcy, Blockbuster stressed that it was "pre-arranged," and that the company has reached an agreement with some of its senior debt holders that will see the chain wipe out its nearly $1 billion in current debt. To accomplish this, those debt holders will loan an additional $125 million to Blockbuster so it can complete a reorganization plan that will examine ways to make its 3,000 US stores more profitable.

To put Blockbuster's debt in perspective, the company's revenues for the fiscal year ended January 3, 2010 totaled just over $4 billion. For the moment, all US Blockbuster stores will remain open and its services will continue unaffected by the restructuring. However, there's no telling how long that will last; former rivals Movie Gallery and Game Crazy kept nearly 800 retail locations open upon entering bankruptcy in February, only to shut them all down in May.

Once the restructuring is complete, the senior debt holders will own Blockbuster, and the company estimates its only debt will be $100 million or less of the restructuring loan. Those who currently own Blockbuster stock or hold junior debt will get nothing under the current plan.

The bankruptcy only applies to Blockbuster's US operations. The company's international counterparts, as well as franchisees both international and domestic, are not part of the Chapter 11 proceedings.

Blockbuster's bankruptcy has been expected for some time. Rumors of the move first appeared in early 2009, when the company was struggling under $328 million in debt. Concerns about the company were sparked again last month after a Los Angeles Times article reported on the company's plans for a pre-arranged bankruptcy proceeding that it would start in mid-September.

As of press time, Blockbuster stock was trading for $0.04, down from its $0.06 close on Wednesday. The company's shares have been trending downward for years, going back to a March 2007 high of $7.30.