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LBO Firm Rescues Blockbuster UK

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Dish Network Corp. (DISH - Free Report) , the second largest satellite TV operator in the U.S., has found a buyer for its ailing subsidiary Blockbuster UK, within two months from the time it filed for bankruptcy in Jan 2013. The DVD and games rental store company was struggling amid stiff competition from online video streaming companies.

Leverage buyout (LBO) firm, Gordon Brothers Europe, has agreed to take over the struggling retailer but has not declared the acquisition price. Per the agreement, the LBO firm will keep 264 blockbuster stores, saving almost 2,000 jobs in the process. Gordon Brothers plans to retain the Blockbuster brand after the acquisition and has got a profitable portfolio of stores to turn the company around. 

Dish Network took over Blockbuster Inc. on May 2, 2011, for $320 million. The acquisition enabled Dish Network to offer several movie streaming services over the Internet, thus efficiently countering the competitive threats from cheap online movie distribution companies like Netflix Inc. (NFLX - Free Report) , Inc. (AMZN - Free Report) , Hulu among others.

When Dish acquired Blockbuster, the video rental company had about 1700 stores across the U.S. and 528 stores in the UK. But ever since its takeover, the UK subsidiary of Blockbuster has been struggling against increased competition from supermarket chains like Tesco and download sites like Apple Inc.’s (AAPL - Free Report) iTunes. In an attempt to tide over the difficult situation the company closed nearly 200 of its 528 UK stores and has sold 49 stores to the supermarket chain, Morrisons.

Though Blockbuster registered a 21% annualized revenue growth in 2012, its operating loss climbed to $31 million as compared to an operating income of $16 million in 2011. The buyout will be beneficial for Blockbuster UK as the LBO plans to make a substantial amount of investment in the stores to return to profitability.

The transaction is beneficial for Blockbuster as a new management could bring in fresh ideas to turn around the struggling DVD rental business. However, for its survival we believe Blockbuster needs to come up with a cost-effective and convenient plan of renting DVDs to vend off competition from online peers. 

Dish currently carries a Zacks Rank #3 (Hold).

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