Blockbuster should liquidate instead of reorganize under new ownership because the video-rental store chain lacks the necessary cash to continue operations after a proposed sale is completed, Home Media Magazine reported, citing a division of the U.S. Justice Department.
A proposed auction stemming from a $265 million acquisition bid from Blockbuster's senior lenders would only help the lenders get paid back and would likely fail to generate enough cash left over for operations, the publication said, citing documents filed with the U.S. Bankruptcy Court from Tracy Hope Davis, a U.S. trustee for Region 2. As of Jan. 2, Blockbuster had more than $130 million in accounts payables, including about $93 million owed for rental discs and videogames.
Blockbuster has put itself up for sale as bondholders for the chain are looking to avoid a further loss in value of the company as it tries to restructure its debt. The company has closed about 1,000 stores in the U.S. during the past couple of years.
Blockbuster in September filed for bankruptcy after years of lackluster financial performance stemming from increased competition from DVD-by-mail service Netflix (NFLX), who capitalized on customers' dissatisfaction with Blockbuster's late fees, and from Coinstar's (CSTR) Redbox movie-rental kiosk operations.
Blockbuster also suffered from overhanging debt from its 2004 spinoff from former parent Viacom as well as from declining packaged media movie-rental revenue. Rentals of packaged media such as DVDs and Blu-ray disks fell to about $16 billion in 2010 from $19 billion in 2005, the Digital Entertainment Group said in a report last month.
Blockbuster representatives didn't immediately respond to a request for comment from DailyFinance.