The last few years have seen a revolution in the restructuring and turnaround industry. Driven partly by changes to the bankruptcy code and partly by the increasing sophistication of capital providers, the long, drawn-out chapter 11 cases were few, and out-of-court restructurings and prepack chapter 11 filings (with DIP lender lined up and all major issues agreed to ahead of time) became the norm.A recent article in The Deal Magazine sheds light on just how contentious the reorganization of this faltering retailer became. The idea that Blockbuster could muddle through without an intensive on the ground team of advisors was obliterated when the company’s 2009 holiday season performance failed to stem the tide of red ink: $1 billion in lost revenue, $558 million in cash burn, 15.6% decline in same-store sales. Sadly, Alvarez & Marsal had their hands full when they got on the scene.
The initial thinking was that the $630 million in senior secured notes would receive 100% of the equity while all junior claims were wiped out. Not a great outcome, but not bad for a bankruptcy.
After a $30 million advertising blitz hyping the company’s 28-day window during which only Blockbuster would have access to new releases failed to revitalize sales, creditors came to realise that the game was up. Said one advisor: “The [noteholder] group was pretty upset about it”. “That was the straw that broke the camel’s back.”
It must be particularly painful to all stakeholders that the sad final sale price of $320 million was arrived at through a heated auction that saw the stalking horse bidder: Cobalt Video Holdco (an acquisition vehicle formed by a Monarch group) compete with Carl Icahn, a group comprised of Great American Group and Hilco Merchant Resources, SK Telecom and The Dish Network.
The decline of a company can be agonizingly slow for a time, but when the wheels come off the value destruction can be unrelenting. This is a fantastic cautionary tale of waiting too long, and the high price of unreasonable optimism.