Dish Faces Studio, Landlord Fights With Blockbuster Acquisition

Blockbuster filed for bankruptcy in September with 5,600 stores, including 3,300 in the U.S. Photographer: George Frey/Bloomberg

 

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April 6 (Bloomberg) -- Kevin Covert, founder and president of Covert & Co., talks about Dish Network Corp.'s proposed acquisition of Blockbuster Inc. Covert also discusses the Wall Street Journal's report that Google Inc.'s YouTube may be planning to spend as much as $100 million on original content for about 20 premium channels. He speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

The $320 million proposed acquisition of Blockbuster Inc. (BLOAQ) by Dish Network Corp. (DISH) will bring with it disputes with landlords and movie studios and questions about the viability of the movie-rental business, analysts said.

The satellite TV provider’s winning bid yesterday beat offers from Carl Icahn and liquidators. Dish said the offer includes $228 million in cash, and hasn’t announced how it will treat the movie studios that are Blockbuster’s main business partners. The deal offers pennies on the dollar even for the creditors first in line to be repaid.

Dish now has to decide how many Blockbuster locations to close as consumers migrate to online rentals, and how to keep relationships with movie studios that may not have been paid the full amount of their claims.

“It doesn’t make sense to buy a melting ice cube unless you’ve got a plan to increase revenue,” said David Berliner, an adviser at BDO Consulting in New York who specializes in restructuring and insolvency issues. Dish may intend to use Blockbuster’s stores to draw in new customers to its satellite business, which competes more with DirecTV and cable companies than Netflix Inc. (NFLX), he said.

Dish may end up winding down Blockbuster eventually, Berliner said. He compared the deal to Cablevision Systems Corp.’s $95 million purchase of the bankrupt electronics chain The Wiz in 1998. Cablevision closed the stores in 2003.

Access to Customers

“They got access to Wiz customers to sell Cablevision services,” Berliner said.

In first round of bidding at an April 5 bankruptcy court auction, Dish offered to pay $39.9 million to cover studio claims, and $142.6 million to lenders who were the highest priority because they had loaned Blockbuster more money in bankruptcy, alongside other priority claims, such as business partners that sent the company goods while it was in bankruptcy.

Dish’s final offer gave $178.8 million to that group: the first $125 million goes to the senior lenders, $4 million goes to other priority claims, and the rest is split 75/25 in favor of senior lenders, according to a person familiar with the situation. That would leave about $36.75 million to cover secured bondholders’ claim of $505 million. The person, who didn’t want to be identified because the matter hasn’t been made public, declined to comment on the final amount put to movie studios’ claims.

Stephen Karotkin, a lawyer for Blockbuster, didn’t return a call seeking comment. Marc Lumpkin, a Dish spokesman, declined to comment.

Cobalt Video

In the court auction, the most competitive bids came from Cobalt Video, a venture between lenders including Monarch Alternative Capital LP, which had set the sale procedure through a stalking-horse offer; Seoul-based wireless and Internet- service provider SK Telecom; and Icahn, a Blockbuster lender and former director who teamed with four corporate liquidators: Great American Group Inc., Tiger Capital Group LLC, Hudson Capital Partners LLC and SB Capital Group LLC.

Only SK Telecom’s offer would have maintained distribution deals with studios, and preserved relationships with suppliers and landlords, SK Telecom’s lawyer David Feldman said at the auction. That bid was rejected by Blockbuster’s financial adviser, Rothschild Inc., which was overseeing the auction along with lawyers for Blockbuster.

Blockbuster Creditors

“There were different currencies being offered to different players, bankruptcy judges don’t like that,” said David Pauker of Goldin Associates, who said he expects legal disputes about how the deal treats different creditors of Blockbuster.

A group of landlords have already objected to the sale, saying in court papers filed yesterday that they have yet to find out from Dish what its intent is for their leases. They asked the bankruptcy judge to adjourn today’s hearing, at which Dish plans to seek bankruptcy court approval of its sale.

Twentieth Century Fox Home Entertainment LLC also said in court papers filed yesterday that it’s owed $20 million under contracts with Blockbuster. Blockbuster has alleged Fox is owed nothing.

Universal Music Group Distribution Corp. said in court papers filed April 5 that it’s owed about $548,681. Blockbuster had proposed paying nothing to satisfy a default on DVDs Universal leased for rental through Blockbuster’s stores and online service.

Court Hearing

U.S. Bankruptcy Judge Burton Lifland is scheduled to consider approval of Dish’s offer in bankruptcy court today, with 110 objections to the sale listed. When companies buy assets through a bankruptcy auction, they get them free of liens, or claims that existed prior to bankruptcy, and some objections may be overruled.

Shahid Khan, chairman of MediaMorph, an adviser that tracks how content performs on different platforms for media companies, said Dish may have overestimated the depth of Blockbuster’s relationship with studios, and the importance of the Blockbuster’s brand.

“In the end it’s all about money,” Khan said. “Studios are in the business of selling content in as many ways as possible.” Kahn’s clients include some of the studios that have worked with Blockbuster, such as Sony, Universal, and Fox, he said.

“The Blockbuster brand isn’t synonymous with digital media, Netflix and Apple are,” Khan said. “Most people still remember Blockbuster as the company that charged you tons of late fees when you rented movies.”

Priority Creditors

There may yet be a fight about whether Blockbuster waited too long to file for bankruptcy, or how its sale deal treats the professionals hired to advise Blockbuster, said Stephen Lubben, Daniel J. Moore Professor of Law at Seton Hall University School of Law. Rothschild and bankruptcy counsel Weil Gotshal & Manges LLP could be compared with other priority creditors, such as movie studios that supplied Blockbuster with titles even after it was in bankruptcy.

“If it looks like the insiders are taking care of themselves at the expense of others you’ll have a big problem,” Lubben said.

Blockbuster filed for bankruptcy in September with 5,600 stores, including 3,300 in the U.S., saying sales shrank in recent years while Netflix Inc. grew by renting movies online and through the mail, and Coinstar Inc. (CSTR) put Redbox DVD vending machines in supermarkets and drugstores.

The case is In re Blockbuster, 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net