Blockbuster's Year of the Dog

This must be the year of the dog for Blockbuster (BBI) because despite recent denials that they are not looking to sell off their international operations, it’s beginning to look like they are walking away from the international markets with their tail tucked in between their legs.

Less then a week after the company denied that they are trying to sell off their international properties, we’ve seen the company abandon their affiliate program in the UK and now Digitimes is reporting that they’ve sold off their Taiwanese Blockbuster locations to Taiwan based Webs-TV.

Webs-TV wouldn’t confirm or deny that a deal has taken place, but Digitimes has said that the acquisition will be for all of their stores in Taiwan, as well as the rights to use Blockbuster’s name and trademark in the future.

The good news for Blockbuster is that they’ll have one less division bleeding losses at an alarming rate for the company, but the bad news is that next year is the year of the Pig and Blockbuster may get slaughtered as the loss of revenue from their international operations continues to impact their flexibility in a rapidly changing industry.

While I’m sure that Blockbuster will likely point to issues with piracy as their motivation for leaving Taiwan, I see their struggles in Taiwan as an early indicator of some of the challenges that Blockbuster will face in the US markets as the digital revolution makes it way past the DVD and through the net.

While DVDs and the video stores still have some life left in them, there is little doubt that media is moving away from the stand alone video store business model and towards direct distribution over the internet. Will Blockbuster be able to innovate fast enough to stay in the game? Only time will tell, but thus far they’ve invested in Cinema Now and have spent a tremendous amount of energy in promoting their own online competition to Netflix, yet so far they’ve gained relatively little traction from these moves. The company has done a good job at cutting costs over the last year, but at some point it will become increasingly difficult for the company to cut costs fast enough to keep pace with the number of video stores going into the red.

While an early exit out of Taiwan may help focus Blockbuster’s business on the US markets, I question what Blockbuster plans on doing once the same pressures that they face overseas begin to happen domestically.

Comments

[CrossProfit_:]

On 11/20/06 SA contributor, stockreply.blogspot.co... strongly recommended shorting BBI @4.75. Since then BBI dipped a bit and then shot up to 5.26. What has been made public is that the CEO purchased 220,000 shares (below 4.75 - guestimate) and that BBI may have sold off its money losing operations in Taiwan.

This does NOT explain a 16+% jump on a whopping 12M volume (usually 1.7M). This is a full 6% of all outstanding shares trading hands in one session whilst maintaining the higher price level. If anything, maybe ‘Taiwan’ is buying BBI! At a 1B market cap it is possible that BBI is selling itself off piecemeal. First divesture of Taiwan, then the U.K. and they may have a buyout offer for the U.S. as a solo business. This would explain the CEO buying shares now. Let’s face it, a PE of 19 with little growth prospects smells like a Hedge Fund is behind the scenes.

All of the above is pure conjecture and there are no conflicts of interest.

Disclosure: Personal opinion of a CrossProfit analyst and does not reflect the opinion of CrossProfit.com.
www.crossprofit.com

2006 Nov 22 07:28 PM

[Amit Chokshi_:]

BBI might be a short to zero but between now and then there will probably be plenty of volatility. This stock's been heavily shorted for a few years so recommending a short at $4-$5, basically near its all time low, when a lot of shorts have made significant money on the way down probably requires very tight buy stops (as tight as 5%).

BBI wouldn't be an attractive buyout candidate, it's currently valued at 6.0x EBITDA which is not cheap for a company that is struggling like BBI is. Icahn is still in BBI as well as other investment managers and they would not give in to a low ball premium like typical dumb money institutions (Fidelity, T Rowe, etc). Leonard Green "won" the war for Hollywood Video at a greatly reduced price and that performance hasn't seemed to be very pretty even with a seemingly cheap price.

With the leverage on BBI and it's cash flow, there's not a lot of juice left to pay a big premium and that prob won't win over Icahn and other investors. On top of that, there have been other decent businesses like JAG and CSC that couldn't find buyers and there are plenty of good businesses that are cheap relative to the financing PE firms can obtain where as BBI is probably too big of a challenge. Maybe 5 years ago, a deal could have been done to milk the company for cash but at this point with improvements and changes in technology and delivery of content changing so rapdily, BBI's cash production is dwindling at a much faster rate than people probably expect.

2006 Nov 22 09:33 PM

[CrossProfit_:]

Amit Chokshi,

It looks like a set up for a short squeeze. Institutions have sold 12.7M shares and have bought 28.2M shares over the past 3 months for a net gain of 15.5M. Net holdings are up to 126M.

Short interest has dropped from 35% to 30% (16/11/06) to 23% (22/11/06). The smart money is out. A deluxe short squeeze occurs when a stock is trading near its 52 week high. BBI is at a 52 week high!

I totally agree with your analysis that the increased volatility has to do more with shorts than anything else. I disagree with my CrossProfit (NY) colleague.

Disclosure: Personal opinion of a CrossProfit (IL) analyst and does NOT reflect the opinion of CrossProfit.com.
www.crossprofit.com

2006 Nov 23 04:08 AM