While satellite-TV giant DISH Network (DISH +0.00%) continues to pour money into its wireless network buildout and battles Sprint for highly sought-after Clearwire assets, the company has also been trying to wind down its position in video-rental dinosaur Blockbuster. The effort hasn't gone as quickly as investors and analysts may have liked, but there was progress this week when the company sold off Blockbuster U.K. to a team of restructuring specialists in the area. The sale represents another a step in the right direction, but DISH needs to go ahead and get this balance sheet ball-and-chain off the books for good.
Why
As a close follower of deep value and special situations, I'm all for reinventing and restructuring, but from the moment DISH Network bought then-bankrupt Blockbuster to help leverage their own offerings, I could not see a silver lining to the befuddling deal.
In 2011, DISH paid $320 million for the video rental artist formerly known as Blockbuster. It was viewed as a potentially lucrative deal, given the company's video catalog and the foundation for building a formidable competitor to Internet streaming gorilla Netflix. Those elements made sense at the time, but the company did not take immediate steps to start closing stores. These stores have, predictably, deteriorated and given DISH little more than a place for people to walk by and reminisce about the '90s. The company used the stores as a showroom for DISH satellite offerings, and was able to sell some subscriptions. Overall, though, sales at these stores could not justify keeping them open.
Starting in 2012, the company slowly but surely began closing stores -- 500 throughout the year. Management considered these 500 stores "underperformers," while allowing others to remain open and continue to add value to the parent company. The problem? All of the Blockbuster stores are underperformers.
Earlier this year, management announced plans to close an additional 300 stores in the United States. This meant 2,000 jobs lost, which is terrible, but certainly not the fault of the company. It was, unfortunately, a long time coming.
Why DISH management thought it could reinvigorate Blockbuster, I am not sure, but investors should be glad to see more of these relics on their way to retirement.
More closure
This week, the company announced that its bankrupt U.K. subsidiary, Blockbuster in Britain, has found a buyer in restructuring group Gordon Brothers Europe. I would love to know what Gordon Brothers intends to do with the company, but that isn't quite relevant to DISH's interests. Blockbuster in Britain currently has 264 stores, down from 528 a year ago. These stores will remain open, saving 2,000 employees from the chopping block and allowing a final effort to save the chain in the U.K.
The good news is, DISH has washed their hands of a losing business, and now has only a few hundred more stores back on our shores to wind up.
In January, management claimed that it would continue to evaluate the performance of the remaining stores and keep open ones that aided the company's efforts. Blockbuster, according to management, is an important part of DISH's video on-demand efforts (the company does have a streaming component, similar to Netflix). It also could be used as a platform for selling the company's wireless service, whenever that comes to fruition.
As I've mentioned before, though, having hundreds of near-vacant stores waiting around for the launch of a still-up-in-the-air wireless initiative does not seem like the best use of capital. Though it is not a large portion of the company's expenses, I would prefer to see this asset sold off as soon as possible, allowing the company to focus solely on its wireless segment and, of course, its core operating business -- one which has not grown nearly as much as competitor DIRECTV (DTV +0.00%).
Right direction, not quite there
DISH management is competent and, in general, is shareholder-friendly. I believe the company will perform well, even if it takes a couple of years.
In the meantime, though, DIRECTV remains the stronger player in the satellite television space. The company doesn't have any comatose business to keep on life support, nor does it have billions tied up in the tight battle for a wireless network. Recently, rumors flew that DIRECTV was in prime position to takeover DISH, creating a satellite-TV juggernaut that could seriously stoke the fire under cable and telecom companies.
Investors in DISH should view this latest jettison as a step in the right direction, but U.S. Blockbusters will remain a deterrent until they are off the books.
