Business

Blockbuster in the US tipped to enter bankruptcy, as fashion giant hits trouble

James Thomson /

Iconic US video rental chain Blockbuster could be set to enter bankruptcy next month in a pre-planned move that will allow it to restructure its operations.

According to a report in the Los Angeles Times, Blockbuster has held discussions with major Hollywood studios about the plan, which is designed to help the company sort out $US1 billion in debt and get out of 500 leases or more of its 3,425 stores.

 

Any bankruptcy in the US would not affect the Australian Blockbuster chain, which has been owned separately by Paul Uniacke of Franchise Entertainment Group. Uniacke also owns the Video Ezy chain in Australia.

 

According to the LA Times, Blockbuster has lost $US1.1 billion since 2008, and closed 1,000 stores in 2009.

 

As well as competition from illegal movie downloads, Blockbuster has struggled to compete with internet-based rental company Netflix and RedBox, which rents videos through kiosks.

 

The company recently secured an agreement with its debts holders – who are owed $US920 million – to suspend interest payments until September 30 (known as a forbearance agreement), but would seek to use Chapter 11 bankruptcy to restructure its debt load and restructure the company.

 

It is possible that under any recapitalisation process, debt holders would be asked to swap debt for equity, thus becoming shareholders in Blockbuster.

 

Blockbuster refused to comment on the LA Times story, but said in a statement to the paper: “The extension of our forbearance agreement is a strong sign of support from our senior secured noteholders as we work toward putting in place a more appropriate capital structure to support Blockbuster’s long-term growth… Our discussions continue to be productive and we have every reason to believe we will come out of the recapitalisation process financially stronger and more competitively positioned for the future.”

 

Another US giant facing mounting financial problems is fashion giant American Apparel, which last week received a notice from the New York Stock Exchange warning that it could be delisted if it does not file its second-quarter results in a timely matter.

 

Speculation surrounding American Apparel’s future has been building since the start of the year as losses and debt has mounted at the company.

 

Last week, the company’s auditors Deloitte & Touche resigned, citing “material weaknesses in internal controls over financial reporting”.

 

The company’s shares, which traded at $US15 in 2007, are now wallowing at US74c.

 

Last week British newspaper The Guardian suggested American Apparel could be forced into receivership if a private equity firm, Lion Capital, calls in an $US80 million loan to the fashion company.

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James Thomson

James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review's companies & markets editor, and a former BRW editor.

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