As a retail company held captive within a media conglomerate, Blockbuster is a prime target for a private equity firm looking for a Viacom carveout. And with little or no overhanging debt, but predictions of trouble on the horizon, the video chain could soon belong to an LBO heavy hitter.
Blockbuster has hired Bear Stearns as an advisor, and the firm has opened the bidding by sending its book out to a select list of buyout shops, including The Blackstone Group, The Carlyle Group, Kohlberg Kravis Roberts & Co., Providence Equity Partners, Quadrangle Group and Texas Pacific Group. But it’s likely a few of these firms won’t pursue the target further than receiving the book, for a couple reasons.
While Blockbuster’s small amount of outstanding debt is a plus, the video rental industry is seen by many as having already reached its peak and is now on the way down. Analysts predict services that offer movies on demand through a customer’s cable TV package will only cut into Blockbuster rental numbers. Further, while Blockbuster is making a valiant attempt to diversify by selling new and used DVDs, Blockbuster CFO Larry Zine’s reportedly insists on selling its DVDs at retail prices-despite the fact that companies such as Wal-Mart sell them at a discount. Lastly, Blockbuster may not have much room to grow, having saturated the market when it comes to storefronts. The company has more than 8,700 stores and opens an additional 350 to 400 stores each year.
Blockbuster has its share of competition as well. Netflix, a startup headquartered in Los Gatos, Calif., rents movies online, mailing more than one million customers the product with a stamped return envelope. The concept began when the company opened its doors in April 1998, and after less than six years, still employs a mere 400 people, 1,400 less than Blockbuster employs in its Dallas headquarters alone, an immense difference in payroll and related costs. While Blockbuster’s revenue far surpasses Netflix revenue, many think online rental is the next logical step in the evolution of the video rental business. And with five years experience under its belt, Netflix has solid name recognition, which could make it difficult for Blockbuster to gain a foothold in the online rental business.
Private equity firms have often pulled the rabbit out of the hat, turning around companies seemingly headed for the scrap heap. But the question remains, can a private equity firm, regardless of its market savvy, change the inevitable?