Did Blockbuster Save Its Shareholders?

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Last week, video rental chain Blockbuster (OTC BB: BLOAQ.PK) avoided a total liquidation. You may call it a "stay of execution," or maybe a "second chance." Either way, Blockbuster's Pink Sheet-listed shares jumped sky-high on the news.

I've told you before that Blockbuster is going to zero no matter what. One curious reader, who professed not to own any Blockbuster shares but simply wanted to learn how things work, emailed me:

I read your article on Blockbuster going to zero. ... Does the auction in April change anything ... or are common shareholders still left with nothing?

So there's still some doubt on this point, I suppose. The answer hasn't changed: Common shareholders have very little to look forward to.

Whoever ends up owning Blockbuster after a court-approved auction is very, very unlikely to pay more than the $820 million of net debt on Blockbuster's books. Creditors get paid first, because Blockbuster offered up its assets to back those loans; there will be nothing left over for common, Class B, or even preferred shareholders in a case like this.

If Blockbuster ever makes it back to the stock market, those shares will be minty-fresh, having nothing to do with today's old and busted stack of stock. The market moves going on right now (up 30% on Friday, down 20% today) are akin to rearranging the deck chairs on the Titanic, or telling Charlie Sheen to start making sense -- they have nothing to do with reality.

The fallout on Blockbuster competitors Netflix (Nasdaq: NFLX  ) and Coinstar (Nasdaq: CSTR  ) is for real, though. Keeping Blockbuster's doors open a while longer will affect the rest of the industry, though I'm not convinced that it's a very big deal. Clean balance sheet or not, Blockbuster still needs to figure out how to exist in a digital era without burning cash on an open fire. The once-proud market leader has become a punch line for The Simpsons.

The same lessons should apply equally to other bankruptcy cases, including bookstore chain Borders. Airline investors should be familiar with these concepts, having seen nearly every major industry player bouncing in and out of bankruptcy with disastrous effects for shareholders. And then there's bankruptcy poster boy General Motors, which also cleaned out stock owners completely before getting back on the public market. Like Blockbuster, GM's management even told investors that their shares were now worthless.

Chapter 11 bankruptcy protection may not mean the end of the company, but it's almost always fatal to the stock. Debt-holders get paid first, and then they own what you thought was yours. The end.

I hope that answers your questions, dear reader.

Adding Blockbuster to your Foolish watchlist won't do you much good, but Netflix and Coinstar both make a lot of sense on that list.

Fool contributor Anders Bylund owns shares of Netflix. General Motors is a Motley Fool Inside Value selection. Netflix is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2011, at 4:21 PM, madderthanwethen wrote:

    how do you know what the bid will be? You don't, blockbuster is a good buy for the right company, and with a reasonalble bid, the shareholders will be paid. It is bashing like this that hurts the stock.

  • Report this Comment On March 14, 2011, at 4:25 PM, madderthanwethen wrote:

    P.S. just read that you own shares in netflix and that netflix is a motley fool pick. Now I know why you are bashing. and anyone with any sense will know it too. BTW, motley fool advise should be taken the exact opposite. You pumped AOB all the way down.

  • Report this Comment On March 15, 2011, at 9:07 AM, TMFZahrim wrote:

    Yeah... Carl Icahn's starter bid is $290 million:

    That's a long way from covering the company's capital needs, and won't even pay off the delinquent loans. The same would be true for a bid twice or three times that size. This for a perennial money-loser operation with an almost 100% deprecated asset base (think aging stores) and no clear way back to profitability.

    Blockbuster would be a good buy for a reckless company with a billion dollars to burn, which is all out of matches and lighter fluid. That debt will be settled for pennies on the dollar, shareholder stock will become worthless, and debtholders will become the new owners. You might as well buy Monopoly bills -- that way, you can at least play a wholesome family game with your holdings. The value is otherwise about the same.


  • Report this Comment On March 16, 2011, at 4:17 PM, chrisyamaha wrote:

    "there will be nothing left over for common, Class B, or even preferred shareholders in a case like this."

    Blockbuster's chief legal counsel, Rod McDonald, stated this week that there are currently around a dozen companies in Blockbuster's data room conducting due diligence, and that he expects bidding at the forthcoming auction to be "robust."

    "Yeah... Carl Icahn's starter bid is $290 million...Anders"

    Carl Icahn was not the $290 million stalking horse bidder. Monarch Capital was. Get it together.

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