Blockbuster: Merger Could Interfere with a Good Turnaround Story

4/14 - "Our initial analysis of the deal leads us to tentatively conclude that Blockbuster intends to raise around $500 million through a rights offering, plus an additional $500 - 800 million in incremental debt. The combined company would have around $120 - 150 million of EBITDA before synergies, implying a debt to EBITDA ratio of 6 - 11x. It is not clear to us that Blockbuster will succeed in financing this transaction."

"Blockbuster also preannounced positive Q1 results, expecting adjusted EBITDA of $110 million (our prior estimate was for $80 million) and net income of $30 million (our prior estimate was for $6 million)...We are raising our 2008 estimate for revenue to $5.266 billion from $5.246 billion, and for EPS to $0.15 from $0.03. We are maintaining our 2009 estimates for revenue of $5.040 billion and EPS of $0.40."

"...we believe that investor concerns may cause Blockbuster to abandon this proposal. We prefer that Blockbuster stay the course on its own restructuring, continuing its focus on cost containment, revenue growth, asset sales and debt repayment, with a more immediate return to shareholders...we think that an acquisition of this nature will cause a distraction that may detract from management's ability to complete the turnaround it has underway."

"Maintaining STRONG BUY, and our $7 price target, which reflects a multiple of 18x our 2009 EPS estimate of $0.40. This multiple is near the high end of Blockbuster’s historical range, as we expect higher than average earnings growth."