NEW YORK – Home movie rental giant Blockbuster filed for bankruptcy on Thursday after racking up debts of nearly $1 billion.
The company has not been able to hit its profit targets since media conglomerate Viacom (VIA) spun off the company in 2004.
Blockbuster was also required to pay VIA shareholders $5 per share in dividends due to that deal. The move ultimately contributed to the rental chain’s billion dollar debt.
Blockbuster has filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of New York. The company will attempt to reduce its debt load to $100 million or less as part of its recapitalization plan.
The company also suffered losses from unprofitable stores and increased competition from both Netflix (NFLX) and Coinstar’s (CSTR) Redbox.
Although Blockbuster holds the advantage over its competitors by having the latest releases in each of its 3000 stores throughout the U.S., more cost conscious consumers appear to be turning the less expensive Redbox. Additionally, more people have started opting for the convenience of an online purchase of the type that Netflix offers.
Reports released on Thursday indicate that Blockbuster – who has stated it will continue to serve its customers – managed to secure $125 million in financing from senior bondholders to keep its stores operating during the bankruptcy proceedings. However, cost-cutting measures will have to be taken in order to turn the company around as fast as possible.
Michael Pachter, an analyst with Wedbush Morgan Securities, said “When they were run by shareholders, the company was making investments and trying to grow. Now that they’ve been seized by creditors, Blockbuster will have to manage the business as lean as possible.”
Blockbuster warned of a possible bankruptcy as early as March of this year.
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