Peter Kafka

Recent Posts by Peter Kafka

Blockbuster Investor Bets Against Chapter 11

blockbuster-storeCan troubled video rental giant Blockbuster survive without filing for bankruptcy protection? Yes, says a former competitor, who is betting a few million dollars on that proposition.

Mark Wattles, who founded onetime Blockbuster (BBI) rival Hollywood Entertainment, has bought up a 5.7 percent stake in his former rival. And he says he thinks the company will be able to pay off its debt, $150 million of which comes due in August.

The SEC filing describing the purchase doesn’t disclose the price that Wattles paid for the shares. But he bought them on March 4th, the day after the stock plunged on reports that it was considering Chapter 11.

Blockbuster later said that it simply hired a law firm to help it with financing issues, and since then shares have rebounded. News of Wattles’ purchase pushed them up a tad more–by the end of the yesterday they were trading at $0.76, up 17% from the day before.

Wattles bought 6.8 million shares on March 4. If he paid 50 cents for each one–the midpoint of the trading range that day–he would have spent some $3.4 million. That same investment would have been worth about 100,000 shares in red-hot Netflix (NFLX).

But if Blockbuster does file Chapter 11, Wattles has some protection: He already owns a slug of the company’s 9 percent senior notes, which means he’ll have a voice in any restructuring that takes place.

Wattles’s SEC filing comes with a mini testimonial to current Blockbuster management. That’s unusual for a disclosure form, so make of that what you will. Here’s the relevant part:

The Class A shares of Common Stock were acquired… because of his belief that the Issuer does not have a motive to reorganize under Chapter 11..  Given the operating fundamentals of the Issuer combined with the short term of its real estate leases (typically five years) and the aggressive and proactive manner in which the Issuer has managed its store base (including relocations, store closings, reductions in store size and subleases), Mr. Wattles does not believe that the Issuer has a motive to reorganize under Chapter 11.  … Mr. Wattles believes the Issuer will be successful in refinancing its revolving bank line of credit, or if it cannot, that it will be able to use cash flow from operations to meet its August repayment obligations and 2009 liquidity needs.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik