Blockbuster Inc. (NYSE:BBI) has received a boost from Mark Wattles, the founder of defunct rival Hollywood Entertainment Corp., as he purchased a 5.7% stake in the movie rental chain and said he doesn't believe the Dallas-based company will file for bankruptcy any time soon. Like the many films one can rent from Blockbuster, the plot sounds familiar. And it should, because Wattles has been down this road at least twice since becoming an activist investor.
Wattles, co-founder and former CEO of Hollywood Entertainment, which he sold to Movie Gallery Inc. for $1.2 billion in 2005 and currently the majority owner of the Ultimate Electronics Inc. chain, said in a Securities and Exchange Commission filing on Monday that he acquired the shares for investment purposes because he believes Blockbuster "does not have a motive to reorganize under Chapter 11."
Is Wattles serious? After all, his track record of investing in troubled retailers seems mixed at best.
In February 2008, his Wattles Capital Management LLC amassed a 6.5% stake in struggling Circuit City Stores Inc., where he agitated for change by nominating five directors to the electronics retailer's board. At first Circuit City resisted his proxy, but ultimately it gave in and settled with Wattles when CEO Philip Schoonover stepped down, and was replaced by James Marcum, one of Wattles' board nominees. In the end, however, Wattles' efforts were for naught as the firm filed for Chapter 11 bankruptcy protection in November, and ultimately liquidated after failing to find a buyer or exit financing.
While Circuit City was a failure, Wattles had more success with an earlier activist campaign against smaller electronics retailer, Ultimate Electronics. Interestingly, Wattles amassed his holdings in Ultimate Electronics shortly before its 2005 Chapter 11 bankruptcy filing and bought half its stores at a bankruptcy auction.
Clearly Wattles is hoping for a happy ending akin to the Ultimate Electronics outcome. However, it all hinges on the state of the economy. When he made his Circuit City bet, the economy was healthier with Bear Stearns Cos.' collapse only just a little ways over the horizon. Likewise, Wattles' Blockbuster bet will essentially hinge on the timing of an economic recovery -- or at least an improvement in the credit markets. Circuit City's bankruptcy didn't have to be the end of the chain, but it liquidated because of a lack of exit financing. Should Blockbuster file for bankruptcy, its survival hinges on whether the economy and credit markets improve enough that it can secure exit financing.
And like a Hollywood sequel, it's possible the plot could take an unexpected twist with Wattles' claim of Blockbuster not needing to reorganize in bankruptcy coming true. - Matthew Wurtzel
See February 2008 post about Circuit City from Dealscape
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