Bankrupt Blockbuster Inc. (BLOAQ), once the world’s largest movie-rental chain, can auction itself with a newly revised $290 million bid from hedge funds and avoid immediate liquidation, a judge ruled.
U.S. Bankruptcy Judge Burton Lifland in Manhattan said in court today he will approve the sale proposal to a group of lenders including Monarch Alternative Capital LP, even as he said the company is so deeply insolvent it may not be able to repay its highest priority creditors. The company said the deal will save 22,000 jobs.
The ruling came after a hearing was delayed six hours as at least 50 lawyers for movie studios, hedge funds and other creditors clustered in groups outside his courtroom trying to reach a last-minute agreement on the terms of the sale.
“The parties have come to an accord and presented us with a more palatable situation,” Lifland said, praising a resolution that he said resolved his criticisms of a prior offer he had called “garbage.”
Separately, Lifland said Carl Icahn and his funds can bid for Blockbuster in an auction that will test the so-called “stalking horse,” or leading, bid from Monarch. Lifland has yet to set a date for the auction, after Blockbuster proposed one for April 4, with bids needing to be submitted by March 31.
“If you’ve got deep pockets, empty them out at the auction,” Lifland told lawyers for Icahn, noting that he hadn’t made a finding on whether the billionaire was an insider. Junior creditor Lyme Regis Partners LLC said in court papers that Icahn, who owns the bankrupt movie-rental company’s senior debt, shouldn’t be allowed to bid because as a former board member of the company, he’s had insider information.
Blockbuster, based in Dallas, filed for bankruptcy on Sept. 23 and has been locked in dispute with movie studios and other unsecured creditors about whether it can sell its assets to a group of hedge funds who have lent the company money to keep operating in bankruptcy.
Some creditors called for immediate liquidation of Blockbuster, as did the U.S. Trustee, an arm of the Justice Department that oversees bankruptcies. Brian Matsumoto, a lawyer for the U.S. Trustee’s office, told Lifland today that he still supports a liquidation despite the revised sale proposal.
Lifland had rejected a prior offer from Monarch, and adjourned a March 2 hearing on it.
Stalking Horse Agreement
The new stalking horse agreement removes the ability of Blockbuster’s prospective owners to force it into a Chapter 7 bankruptcy to liquidate, Stephen Karotkin, a lawyer for Blockbuster, told Lifland today.
It also calls for $40 million in administrative claims to get $3.5 million from Blockbuster’s cash, and for movie studios to support Blockbuster’s digital distribution model, while shipping new titles on a cash-in-advance basis, lawyers told Lifland.
Jeffery Stegenga, Blockuster’s chief restructuring officer, testified in court today that about $100 million in administrative claims from movie studios would be frozen under the new agreement. He said a sale is preferable to a liquidation, as it saves jobs, and preserves more value for creditors.
Lifland said Blockbuster still appears to be “administratively insolvent,” or unable to pay its priority claims and cost of its bankruptcy.
Unsecured creditors still have little hope of a recovery unless a more attractive bid is submitted at an auction, said Richard Kanowitz, a lawyer for the committee of unsecured creditors.
Forty-five creditors had objected to Blockbuster’s initial deal, including Walt Disney Co. (DIS), Universal Studios, Yahoo! Inc., the U.S. Trustee’s office, landlords and unsecured creditors.
At a March 2 hearing on the initial bid, Lifland said it was “the most aggressive document I have seen in 35 years on the bench.” He added; “If anything is going to fly, this garbage truck better sprout wings.”
Key objections came from large movie studios, who tried to bar Blockbuster from distributing titles to their movies. Dennis McGill, Blockbuster’s chief financial officer, said in an interview today that the studios are “important partners.”
Negotiations leading up to the hearing were to “talk about their ongoing relationships with blockbuster,” he said.
Claims for Movies
Studios are instrumental to the company’s survival, and have claims for movies distributed to the DVD renter after it filed for bankruptcy that should have priority over other creditors, Universal Studios, Sony Pictures Home Entertainment Inc., Twentieth Century Fox Home Entertainment, and others said in court papers.
Fox said it had effectively helped finance the bankruptcy by continuing to make shipments to Blockbuster, and asked in court papers that Blockbuster either sequester revenue it got from renting its titles and return the money to Fox, give Fox a “superpriority” to be repaid over other creditors, or stop distributing its titles and return them.
“Fox wants to get paid for the product that it has leased,” Fox lawyers wrote. “ The only way that Fox sees that happening is if a sale happens through chapter 11.”
Sony also said in court papers that a liquidation would “depress proceeds, potentially do considerable damage to the intellectual property and contract rights of all of debtors movie and game suppliers, destroy jobs, diminish competition, deprive all of debtors suppliers with a future.”
Blockbuster began reorganizing in September with 5,600 stores, including 3,300 in the U.S. The bankruptcy petition listed assets of $1.02 billion and debt of $1.47 billion.
Lifland said today that sales like that of Blockbuster’s are becoming more aggressive in bankruptcy, and that the original sale proposal shouldn’t have tried to cut off enforcement of “pertinent environmental law.”
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