Blockbuster Inc. is preparing to file for Chapter 11 bankruptcy within the next few days, a source familiar with the video rental chain's plans said on Wednesday.
The Dallas-based retailer said earlier this year it would close nearly 10 per cent of its stores. Customers have moved away from renting films through its outlets in favor of online services such as Netflix.
It is carrying some $900-million (U.S.) of debt, according to filings with the U.S. Securities and Exchange Commission.
The company is working with debt holders on a plan, under which it would continue operating but shutter hundreds more stores, said the source, who was not authorized to speak publicly about the situation. A bankruptcy filing is expected as early as Wednesday.
The details were originally reported in the Wall Street Journal.
Under the proposed plan, senior bondholders would convert about $630-million of debt into equity of the restructured company. The other bondholders would be wiped out, according to this source.
"We continue to explore all of our options and are making good progress in our recapitalization process," Blockbuster said in an e-mailed statement on Wednesday.
"Our discussions with the studios and bondholders continue to be productive, and we have every reason to believe we will come out of the recapitalization process financially stronger and more competitively positioned for the future."
Investor Carl Icahn holds about one-third of the senior debt, the source said.
Mr. Icahn was not immediately available to comment.
Senior bondholders have agreed to provide the company with a loan of about $125-million to help support operations while it is under bankruptcy protection, according to the source.
The company said in its statement that it had the support "of a wide range of parties" and that it was working on putting in place "a more appropriate capital structure to support Blockbuster's long-term growth, including investments in our multi-channel platform and new opportunities."
As of early this year, Blockbuster had more than 6,500 stores in the United States and internationally. The company has introduced a movie download service to move beyond retail locations, but that service lags behind Netflix's offerings.
Blockbuster rival Movie Gallery Inc. filed for bankruptcy in February. Though the operator of the Hollywood Video rental chain initially planned to reorganize, by May it had decided to liquidate entirely.
"The problem is, the entire business model may not be viable," said David Pauker, a turnaround specialist for Goldin Associates who works with the media and entertainment industry. "No one knows how quickly the business of physically renting films and games is going to shrink or go away."
Still, supporters of Blockbuster say there is still room for the business model.
"The rental business is still an important component," said David Bank, an analyst with RBC. "It's far less profitable than it was, but it represents a material amount of revenues to the home video business."
Landlords are likely to suffer, however.
"Blockbuster's problems are bad news for landlords, who have already taken back many leased premises as a result of retail bankruptcies and are facing a buyers' market for their properties," said Mr. Pauker.
As with the bankruptcy of Movie Gallery, Blockbuster's filing is likely to expose fault lines between parties that could be crucial if the company is to survive in some form.
Landlords will fight to keep their particular stores open, given the weak real estate market, while film studios want buyers for the movies, with or without stores.
Both groups are likely to be on the committee of unsecured creditors in the case, potentially making it difficult for the committee to perform its usual role of acting as a counterweight in court to the company's plans.
However, the company has had months of planning to address these issues.