Blockbuster: Now 30% Less Doomed

Blockbuster (NYSE: BBI  ) may not file for bankruptcy after all.

So says Mark Wattles, founder of Blockbuster rival Hollywood Video, who this morning revealed in an SEC filing that he now owns 5.7% of the company:

Given the operating fundamentals of the Issuer combined with the short term of its real estate leases (typically five years) and the aggressive and proactive manner in which the Issuer has managed its store base (including relocations, store closings, reductions in store size and subleases), Mr. Wattles does not believe that the Issuer has a motive to reorganize under Chapter 11 ... Mr. Wattles believes the Issuer will be successful in refinancing its revolving bank line of credit, or if it cannot, that it will be able to use cash flow from operations to meet its August repayment obligations and 2009 liquidity needs.

Talk about great PR. Investors had bid up shares of Blockbuster by more than 15% in midday trading.

Now 30% less doomed?
Wattles' faith is comforting because he's an industry insider. He's seen the same reports that the rest of us have, and he knows that the company is struggling to free itself from more than $600 million in long-term debt.

We'll know more about Blockbuster's plans on Thursday, when it reports full-year and fourth-quarter earnings after the market closes. Blockbuster bulls hope that management has found a way to restructure $135 million borrowed against a revolving credit facility that expires in August.

But whatever the plan, I find Wattles' prognostications to be aggressive at best. He's failing to consider Blockbuster's competitive advantage -- or lack thereof.

May I have the red envelope, please ...
You no longer need stores to deliver video. Netflix (Nasdaq: NFLX  ) has proven that. So has Hulu.com, a video-streaming joint venture between General Electric (NYSE: GE  ) and News Corp. (NYSE: NWS  ) .

Even so, streaming isn't yet a substitute for physical DVDs and Blu-ray discs. Just look at the rental data. Last year, DVD rentals earned $1.9 billion for movie studios such as Viacom's (NYSE: VIA  ) Paramount Pictures and Sony's (NYSE: SNE  ) Columbia Pictures. And that was in a bad year; actual DVD sales fell 23% during 2008, according to Adams Media Research.

Unfortunately, a healthy rental market isn't necessarily good news for Blockbuster. Coinstar's (Nasdaq: CSTR  ) Redbox is growing massively, expecting revenue to rise some 80% this year. That's pretty impressive when you consider that Redbox already caters to 35 million unique customers, who rent flicks for a $1 a day from its nationwide network of 12,000 automated kiosks.

There's also the library. Here at the Beyers household, roughly 90% of our rented DVDs are county property. The other 10% are delivered by the Post Office via Netflix. So again, why buy Blockbuster if there's no apparent competitive advantage?

Here's why
Perhaps because expectations are so low that any reports of progress could lead to investor profits. "I think Blockbuster is finally catching on. They're making some hefty moves towards online movies, which is the next big thing," wrote CAPS investor pheadbaq in February:

The trickiest part of their whole business at this point are the brick-n-mortar stores and the waning demand for on-site movie rentals. If they can make use of them (turn them into music, video game, movie stores?), then great, but otherwise, they need to ditch them. Kiosk units are very popular now as well (RedBox), so they could gain some market share there as well. Overall I think they're making the moves they need to.

So, apparently, does Wattles. Interestingly, he doesn't specify in his filing whether he considers Blockbuster a long-term holding. Perhaps that's for a reason. Survival alone could lead to multibagger returns; maybe that's all Wattles is betting on.

Maybe that's all any of us should bet on.

Be kind, rewind to further Foolishness:

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Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy could use some popcorn about now. Please pass the butter.


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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 16, 2009, at 4:09 PM, DavisFreeberg wrote:

    Call me crazy, but didn't Wattles say the same thing about Circuit City before they filed for bankruptcy? It's great that he believes in the company, but given his track record, I don't find his opinions very comforting.

  • Report this Comment On March 16, 2009, at 5:43 PM, mrc0007 wrote:

    Wattles was seeking to oust board for poor managment. He had ideas himself to turn around CC, but it was too late.........So he has increased his stake with Blockbuster, with no intensions of any changes and credits the current managment with their goals.....See the difference.....Homework my friend Homework.

  • Report this Comment On March 17, 2009, at 2:05 AM, ActionBastard wrote:

    While it is certainly interesting that Wattles has that much faith in Blockbuster, to be honest he picked up his stake for pennies (literally) so he can take a chance on something that likely won't pan out.

    Blockbuster is more than half a BILLION in debt and struggling to just make payments on that debt. The only thing positive they've been able to say is year over year same store performance, which doesn't make a lot of sense given decreasing revenues and hefty competitors. I think something doesn't add up, but since the SEC doesn't force Blockbuster to prove what they're saying - let's go with it.

    I wonder what Wattles actually sees here, because based on his prior moves he's an opportunist looking to take chances to turn around big brands for bargain prices and nothing more. I'm not sure I see a lot of genius in his movements - ESPECIALLY given Blockbuster's awful track record.

  • Report this Comment On March 17, 2009, at 1:00 PM, wlfpk1 wrote:

    If I had a bunch of money laying around, I would have bought a bunch of shares the other day when it was down to 22 cents a share also! I don't think it is a sign of faith in the company as much as it is a guy capitalizing on the stock hitting rock bottom and him seeing the dollar signs he can make when it gets up to the $1 or $2 per share mark!

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