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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.