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ANALYSIS: Blockbuster

Ben Parfitt
ANALYSIS: Blockbuster

As Premier League football clubs prove on a yearly basis, having a lot of debt doesn’t necessarily mean you are a bad business.

Take Manchester United, it reportedly owes around £520m, but it still attracts over 75,000 fans a week, has a wealth of high profile assets and is regarded as one of the world’s most famous clubs.

UK commercial director Gerry Butler says the same applies to troubled US rental giant Blockbuster.

The retailer has a store portfolio of over 7,000, a presence across Europe, Asia, the Americas, Middle East, Australia and New Zealand, and boasts over 50m customers worldwide.

There is just one drawback – $990m worth of debt. And like many football clubs before it, Blockbuster had to take drastic action in order to clear it. And last month US parent Blockbuster Inc. filed for bankruptcy protection to face the problem.

“The Chapter 11 gives Blockbuster  opportunities to refinance,” says Butler.

“The US is likely to come out of Chapter 11, perhaps at the end of the year. But it will be a very different company with little or no debt.

“Corporate financer Carl Icahn is buying up part of that debt. Prominent people like him are not involved in Blockbuster because it’s a bad business.”

INTERNATIONAL RESCUE

Following the news that Blockbuster US has entered Chapter 11 Bankruptcy, the media got on the phone to find out how many people will lose their jobs and how many stores will be closed in the UK.

The answer is none.

Blockbuster International is a separate entity. It is unaffected by the bankruptcy. And, unlike its US parent, the UK arm is doing very well indeed.

“I don’t think UK companies get Chapter 11,” adds Butler. “The problem in the UK is that people mention Chapter 11 and they say ‘Are you closing down?’ No, it’s absolute rubbish. We’re not dependant on the US for cash.

“The UK business is substantially up year-on-year, if you look at our balance sheet we’re sitting on over £50m on net assets. It is an extremely well-funded, cash-generative business.

“Even our core rental business is up six per cent.”

SELLING SEASON

Indeed, Blockbuster’s rental and movie business has allowed it to offset any downturn in the games sector.

“We’ve had a soft games market year-to-date,” continues Butler. “I think part of the problem is the supermarkets cutting prices. But we are less affected by the supermarket activity, because I can offer you the game for a week for £6. We still have a way we can compete. We add more strings to our bow with rental.”

Just as football clubs sell their star players to generate cash, Blockbuster US decided to puts its international business up for sale. It managed to sell its successful Irish chain Xtravision – where Butler and UK MD Martin Higgins both made names for themselves – to Birchhall Investments for $44m last year. But a buyer for its UK arm never appeared. And Butler thinks that now there may not be a sale at all.

“Selling the international assets was one of the options for Blockbuster,” says Butler.

“But I don’t think they will make a decision on the UK business until after they come out of Chapter 11, and if they do come out of Chapter 11 then I don’t think that they need to sell the international assets. But it depends on what the long-term strategy of the company is.”

So the situation at Blockbuster is not quite as bleak as it first appears. The US parent is likely to live on, while its UK business is performing well.

But what about the future? Even if profits are up year-on-year, Blockbuster still has to contend with a challenging market. With too many stores in secondary locations, how long can Blockbuster UK keep the profits up?

“We have a three-year business plan,” answers Butler. “We are more than just a rental firm – we are becoming a retailer satisfying all entertainment needs. We are testing TV sales in 35 shops.

“We are interested in mobile telephony because the integration between digital games and movies is really important. We also see us selling digital take-out products, such as iPods.”

The retailer even plans to move stores into more prominent High Street locations.

THE ONLINE SPACE

But what about newer online rental firms such as LoveFilm? Is Blockbuster able to compete?

“We are very different to LoveFilm. You pay your fee, but there’s not guarantee you get the films you want. We are integrating our online business with our shops. One of the big services we have is pay us X amount a month for so many movies, and here are some rentals from the shops as well. If it comes down with rain or your partner wants to see Batman, then you can come and get it. If you order from an online provider, it is stuck in the post. It’s a different service.”

Indeed, Blockbuster may have an ageing business model, but it is still very unique compared to its rivals. Hopefully, with online improvements, new products and store locations, it can continue to compete in the Premier League of entertainment retail.

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