There will be no more B-movies at Blockbuster (NYSE:BBI).
The video-rental chain is combining its less frequently traded Blockbuster Class B (NYSE:BBI-B) shares with its more popular Class A equities. Eliminating the dual-class structure has been a trendy maneuver lately. Chipotle Mexican Grill (NYSE:CMG) (NYSE:CMG-B) announced a similar move last month.
Blockbuster's move was long overdue.
There are only a few public companies out there with two classes of stock. Class B shares usually trade at a discount, despite typically packing greater voting power. Liquidity problems for institutions, weak investor awareness, and wide bid-ask spreads are the more logical explanations for why the seemingly more valuable B shares trade for less than their more popular siblings do.
However, the Class B discounts at Chipotle, SunPower (NASDAQ:SPWRA), and Mueller Water (NYSE:MWA) have been historically modest, in the 10% range or narrower. Blockbuster's B shares, on the hand, closed Friday at a whopping 54% discount.
The huge difference may have made it an attraction for arbitragers, who can buy Class B shares and short an equal number of Class A stock, but the wide discount is indicative of the market's pessimism with Blockbuster as a whole. If the consensus is that the stock is heading to Nil City, it's a 100% loss regardless.
For that reason alone, this is a great move by Blockbuster. It won't have to explain the embarrassing disparity as it dusts off new turnaround initiatives.
Besides, Blockbuster has a new fire to put out. The New York Stock Exchange notified the chain last week that it needs to get its stock back up over the $1.00 mark to remain in compliance. It has six months to make it happen, and it joins Sirius XM Radio (NASDAQ:SIRI) and others in finding ways to prop up their share price or perform reverse stock splits to avoid exchange delisting.
Consolidating its dual-class structure will hurt in the near term. The Class A shares are barreling lower as its Class B shares are rallying. This may not be the right time, but Blockbuster is certainly making the right move.
Can Blockbuster be saved? Share your thoughts and ideas in the comment box below.
