Struggling Vidtailer dealing with billion-dollar debt

The decision by consumers to make fewer trips to the video store is forcing Blockbuster and its rivals to revisit bankruptcy protection.

In its annual report, Blockbuster this week said “increasingly competitive industry conditions” raise “substantial doubt about our ability to continue as a going concern,” and warned that it may have to file for Chapter 11 to deal with a mounting billion-dollar debt that goes back to 2004 when it spun off from Viacom.

The announcement comes a month after rival Movie Gallery Inc., the parent of the Hollywood Video and Movie Gallery chains, filed for bankruptcy protection for the second time in three years.

The company will close around 800 stores this year, a third of the 2,400 stores it operates. It has closed more than that in the past three years.

Blockbuster also said it will close stores this year. It owns 4,018 in the U.S. and more than 2,500 overseas.

News that Blockbuster may seek financial protection caused shares of the company’s stock to sink 29% on Wednesday to close at 28 cents.

Blockbuster has long been dealing with a shift in how consumers rent movies, but its financial situation has become more dire, as companies like Netflix and Coinstar’s Redbox steal away more of Blockbuster’s business. VOD movie rentals on cable and satellite services are also taking a bigger piece of the business. Overall, its sales have declined 33% since 2004.

Losses increased 49% to $558 million last year, alone, as revenue declined nearly 20% over the previous year to come in at $4.1 billion.

In reaction, Blockbuster plans to slash $200 million in overhead costs, close more than 500 stores (it closed 572 last year), and sell off businesses in various countries, as well as bring back late fees. It’s also hoping to negotiate more attractive terms with studios for the movies it rents.

When Blockbuster broke off on its own in 2004, it took out a $1 billion loan to pay off $738 million to Viacom, which held a nearly 82% stake in the company at the time.

As the company figures out new ways to attract more customers to stores, Blockbuster is gearing up to launch more kiosks that rent movies, similar to those operated by Redbox. It wants to have 10,000 Blockbuster Express-branded kiosks operating by the middle of the year, but NCR, which will run the service, will need to compete with Redbox to find locations. Redbox already has its kiosks inside major supermarkets, outside convenience stores, at gas stations, and other highly trafficked areas.

Blockbuster already offers a rent-by-mail service as a rival to Netflix, but has struggled to turn that sector of its business into a major moneymaker.

The irony is that the closures come as consumers are renting movies more than ever, with DVD rentals accounting for 75% of studio homevid earnings versus 60% just a few years ago, said Sony co-chairman Michael Lynton, while at this week’s ShoWest confab.

Retailers like Blockbuster and Movie Gallery are fighting over an in-store rental market worth $5.1 billion last year, down from $5.7 billion over the previous year, according to Adams Media Research. Video kiosks generated $917 million in sales last year.

But Blockbuster could still figure out a way to keep the lights on.

It warned of a possible bankruptcy nearly a year ago before delaying payment of debt in the fall. This week’s warning is cautionary language that it is required to make to comply with federal securities law should it come close to defaulting on a loan, the company said.

Movie Gallery owes lenders more than $540 million. Its revenue fell to $1.4 billion in 2009 from $2 billion in 2008.

The company had previously declared bankruptcy in 2007 and emerged a year later with the support of a private equity firm and affiliates.

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