Can vending machines save Blockbuster?

The video store chain will need a home run from its kiosk strategy to stave off another brush with bankruptcy.

By Jamie Dlugosch Feb 24, 2010 2:14PM

Video chain Blockbuster (BBI) has more lives than a cat. Over the last two years the company has had at least two brushes with bankruptcy but managed to survive.


It appears another brush with death is forthcoming, according to The Wall Street Journal on Wednesday. Although the company claims no intention of filing for bankruptcy, the hiring of restructuring advisers cannot be a good sign.


While shutting stores in droves, Blockbuster has pinned its hopes on mail order and rental kiosks. But can a copycat strategy akin to a knockoff straight-to-video movie right this ship?


Kiosks have been a great idea -- for Coinstar (CSTR), which the Journal says already has 22,000 Redbox machines up and running. Blockbuster hopes to end the year with 10,000 video-rental machines. In mail order, it's similarly behind Netflix (NFLX), with 1.6 million subscribers compared with roughly 12 million for Blockbuster.


Meanwhile, shares of BBI are a mere shadow of their former selves at 38 cents each, though the company's market capitalization still sits at a not-insubstantial $73 million.


Buyers of the stock clearly believe the company can be revived. Sellers, on the other hand, believe it is only a matter of time before shareholders are entirely wiped out.


At the moment, the sellers would appear to have the upper hand.


While facing sweeping ratcheting changes in the way movies get to viewers, Blockbuster is weighed down by debt -- and expensive debt at that. You don’t survive bankruptcy scares without a cost, and that cost is expensive debt.


Fortunately, Blockbuster does have some cash to deal with current indebtedness. The company is estimated to end the most recent year with approximately $250 million. That amount should help in negotiations with bondholders owed some $300 million.


That said, the company is said to be mulling an exchange of debt for equity that will further pressure current shares.


Ultimately the goal is to create a capital structure that is sustainable over time. The company will need that time to close nonperforming stores and build its mail-order and kiosk business.


In the long run, the company is doing all the right things to create a sustainable business. Unfortunately for shareholders, the short term will be painful and the outcome is far from guaranteed.


Another brush with bankruptcy and significant dilution from a debt-for-equity exchange may slice 50% or more from the current value of shares. If you are so inclined to believe in the vending machine strategy, wait for the dust to settle before acquiring shares.


My analysis of the situation suggests you will be able to buy at a lower price. Instead, I would consider these 10 stocks.


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