Is Blockbuster Back to Its Old Tricks?

Back in September of 2001, Blockbuster Inc. issued a press release about exciting forthcoming changes in the video rental market, along with its earnings report. John Antioco, then chairman and chief executive officer, discussed the coming role of DVD's as a major role in Blockbusters strategy. To make room the company would reduce its inventory on videocassette tapes and take a one time $450 million charge.

The huge write-off against earnings was glossed over by management as an insignificant, one time, non-cash item and stressed that the future of Blockbuster was extremely bright. Heck, the charge was less than one percent of total sales. Antioco's strength was in marketing, not finance; he definitely had a way to spin lemonade out of the huge lemon of a financial report.

The real bottom line was that its rental library, reported on the books at a value of $610 million just seventy days earlier, was admittedly worth only 25 cents on the reported dollar. The implications were grim. After the big bath to earnings it was apparent that Blockbuster hadn't retained any profit from its 1982 inception to September of 2001 from VHS tape rentals. What was to make DVDs any different?

Antioco's huge compensation packages were totally out of whack with the company's performance. Blockbuster's shareholders saw the value of a share of stock plummet from approximately $25 a share at the end of 2001 to about $4 per share at the end of 2007. New board member Carl Ichan, was particularly irritated over Antioco's $7 million cash compensation in addition to over $20 million in restricted stock in 2004. In 2006, Antioco balked at the board's $2.28 million bonus award, demanding a bonus of no less than $7.65 million. Blockbuster actually reported a rare profit in 2006 of $50 million but this was sandwiched between a loss of $584 million in 2005 and $74 million of red ink in 2007.

According to Securities and Exchange Commission filings, Antioco made a total of over $72 million between 2002 and his departure at the end of 2007. He vigorously defended his compensation to the end, as the company lost $4.5 billion during this part of his reign as Blockbuster's top dog. His 2007 compensation alone was $11.5 million. Jim Antioco was obviously a great marketer to convince the board that he was worth all that money. Unfortunately, the evidence points to his legacy as a poster child of excess executive compensation. Blockbuster, the once proud franchise, ran aground during his watch as he pillaged and plundered the corporate coffers.

New CEO Jim Keyes inherits a financial mess. Liabilities exceed tangible assets and online competitor Netflix is actually making money. New management wants to forget about the past and look forward to exciting new developments such as Blue-ray high definition discs and video on demand technology. It's a hauntingly déjà vu experience for embattled Blockbuster shareholders that may wonder if the $785 million of merchandise and videos on the balance sheet as of 12/31/07 is really a truthful number. More capital is needed and there is no margin for error.

Blockbuster, in a fight for its very survival, has made a bizarre $1 billion bid to buy Circuit City. This is an all cash offer. Cash that blockbuster doesn't have. Circuit City has its own set of problems revolving around losses and a failed turnaround but is a much larger company with actual tangible assets. Where would Blockbuster turn to get the funding for their offer? Is this a last ditch desperation move? Is board member and famed corporate raider Carl Ichan behind it all?

Circuit City initially refused to open their books to Blockbuster management. A letter from billionaire Carl Ichan stating that he and his associated entities would "stand ready to purchase Circuit City" if Blockbuster can't, gave Circuit City the message they needed to hear to share company information. We'll see how it all plays out.