They say that a good captain will go down with their ship, but what can you say about the guy who climbs on-board after the ship has begun taking on water? Over the last few years, Blockbuster Video has hit iceberg after iceberg and while they’ve avoided capsizing this long, a $300 million looming debt payment may be the final torpedo that sinks the historic brand. Over the last few months, Blockbuster has seen board members flee like rats off of a sinking ship, but at least one shareholder wants to fight to save the company.
Last week, Greg Meyer fired the first shot in a proxy war by submitting paperwork to have his name considered for a position on Blockbuster’s board of directors. To win, he’ll need to take on board of director incumbent, James Crystal. In the proxy filing, Meyer makes a strong case that he is the more qualified candidate for the position.
-In 2001 Meyer started a DVD kiosk business at a time when most thought the idea was crazy. Eventually, DVDXpress was sold to Coinstar and later merged with Redbox. Mr. Crystal on the other hand has spent his career running an insurance company and doesn’t have any DVD industry experience.
-Over the last year, Meyer has put his own money on the line by purchasing over 600,000 Blockbuster shares on the open market, Crystal on the other hand has less than $50,000 worth of Blockbuster’s stock and only because it was given to him for serving on the board of directors.
-While Crystal’s full time job is his insurance business, he also serves on 7 other boards for various insurance companies. Meyer’s only other board position is with a non-profit that uses movies to help reach young kids.
-Perhaps most damaging of all though, is the related transaction between Mr. Crystal and Blockbuster. Last October, Blockbuster made Frank Crystal & Company their exclusive insurance broker for the company. At the same time, Mr. Crystal, who sits on the compensation committee, was helping to award over $1.5 million in bonuses to Blockbuster executives in a year where Blockbuster lost over a half a billion dollars. Given that Blockbuster CEO James Keyes was awarded $400,000 of that bonus, perhaps it isn’t all that surprising to see him come out against Meyer’s nomination.
In a press release, Keyes rejected the idea of adding Meyer to the board and wrote,
“While we have an appreciation for Mr. Gregory Meyer’s investment and interest in the company, those are not sufficient reasons for his candidacy for the board. We are disappointed Mr. Meyer is pursuing a costly and disruptive proxy contest. A proxy contest can only serve as a distraction to the company when attention and resources would be better used in creating value for stakeholders by implementing our strategic plan. We assure all of our constituencies that we remain committed, as always, to doing what is right for our shareholders, debt holders, employees, and customers,”
Distraction or not, it’s understandable that Blockbuster’s shareholders would be disappointed in the current board of directors. Since bringing on Keyes, Blockbuster has seen their stock fall from $4.46 to $0.29 per share. During that time, they’ve seen Netflix and Redbox take market share from them, while they were concentrating on trying to figure out a way to save Circuit City from bankruptcy. Instead of focusing on offering an all you can eat streaming service, Blockbuster spent their operating income on redesigning their stores. Meanwhile, they’ve continued to lose the confidence of both the stock and bond market.
Given that there aren’t many people who’d be willing to run into a burning building in order to save a video store, I reached out to Mr. Meyers to help better understand what he hopes to accomplish with his proxy run. Below is a transcript from our interview.
Davis: I guess the biggest question on my mind is that with Blockbuster clearly hurting pretty bad right now, why you would even want to get involved with the company. You’ve already proven that you can build a DVD business from scratch, what is it about the challenge of turning the company around that appeals to you, instead of using your time and capital to create another new business?
Meyer: When our team was building the DVDXpress business early on, we spent years struggling to make customers aware of the fact that it was possible to rent DVDs from a kiosk and encouraging them to do so. Blockbuster was such a dominant force at the time that we felt like we were constantly swimming upstream against this 900lb gorilla.
Fast forward to today and the tables have turned so that many people say ‘Why would I ever go to Blockbuster?’ I think the pendulum has swung too far and believe there is an enormous amount of intrinsic value within Blockbuster that can be realized with proper guidance and forward-thinking strategic insight. Love ’em or hate ’em, everyone knows that Blockbuster means movies, and having such widespread brand awareness is extremely valuable.
Davis: Having served on the front lines of the bond market, what insights does this give you into how the banks and hedge funds might be thinking about Blockbuster’s debt right now? Specifically, what sorts of things do you think that they’d like to see in order to be amenable to restructuring overtures?
Meyer: The perception in the market is that Blockbuster’s subordinated notes will be equitized at the expense of shareholders. I believe there are some intelligent steps that management can take to avoid this outcome, which would obviously be advantageous for shareholders- and I have recently apprised them of one such structure. The Company and its legal and financial advisors need to be thinking about creative solutions to bring the company back to health and not take the easy way out by converting sub debt
to equity unnecessarily. My impression is that the Company and its advisors are looking at this as a zero sum game instead of trying to figure out how to creatively increase the size of the pie for all constituents, which I think is doable. That’s why I think it’s so important to have at least one shareholder advocate on the board.
Davis: You also mentioned in your filing that you’d like to pursue a solution that results in the lowest possible dilution, if any, of shareholders. Given the burden of having to service almost a billion dollars worth of debt, can Blockbuster be competitive in an industry whose competition is cutthroat right now? Can you share any thoughts on your rescue plan for Blockbuster and what it might take to save the company?
Meyer: Blockbuster has some incredibly valuable assets and competitive advantages. In addition to huge brand awareness, the Company has very strong relationships with the Hollywood studios. These studio relationships have become more apparent in the last few months with the Warner, Fox, and Sony supply deals providing Blockbuster with day-and-date availability of new release titles vs. the 28-day delay for other channels. This is a huge advantage relative to Netflix and kiosks competitors, and it’s one that Blockbuster has never had in the past. I think the company has done a reasonable job of communicating this advantage to customers with the recent release of ‘The Blindside’ and ‘Sherlock Holmes’.
The studios are smart- they realize it is in their best interest to have a healthy Blockbuster. Blockbuster spends more money on DVD inventory each year than Netflix and the kiosk operators combined, so they’re a very important source of revenue for the studios. And Blockbuster’s a la carte rental pricing is not viewed to cannibalize sales like some of the other distribution channels. So I view Blockbuster’s relationships with the studios remaining strong over time and think the Company needs to continue to leverage these relationships going forward, particularly as digital delivery replaces physical distribution. Keep in mind that the First Sale Doctrine does not apply in the same way to the digital world as it does to the physical world, so having strong relationships with the studios becomes even more important down the road as the studios have stronger control over who gets their content.
For now, having closed many of its underperforming stores already and amid a significant reduction in overall brick-and-mortar industry capacity, Blockbuster’s physical stores represent a true asset if managed properly that can generate significant cash flow for years to come and act as a bridge to its various future distribution channels rather than an impediment.
Davis: Blockbuster released a press release urging shareholders to reject your advances, saying that they were disappointed that you were pursuing a “costly and disruptive proxy contest” at a time when their efforts should be focused on executing their existing turnaround plan. Do you feel that it’s appropriate for Blockbuster management to publicly respond this way and do you have any concerns that your actions could have any negative consequences by trying to shake up the status quo?
Meyer: The reality is that Blockbuster’s management is making the decision to perpetuate a proxy contest. I find it unconscionable that management would be willing to waste shareholders money to fight a full blown proxy contest to keep a qualified, industry relevant and highly motivated individual off the Board. If James W. Crystal is as valuable as James W. Keyes suggests then I would be happy to serve constructively with him on the board. This does not have to be mutually exclusive. Keep in mind the size of the board has shrunk from 9 to 7 over the past few months due to several departures, so having both of us as directors would actually return the board to a more normal size. But this is a decision that Jim Keyes and the Board has to make as it is out of my hands.
Davis: Beyond the finance side of the equation, is there anything that you feel Blockbuster should be doing to make their product more relevant to consumers?
Meyer: Yes, I think the value proposition to customers can be significantly improved. Look at the smart things that smaller brick-and-mortar video competitors like Family Video (rental) and MovieStop (retail) are doing. These companies have been growing rapidly over the past several years as they’ve figured out how to remain relevant with consumers despite growing competition from Netflix and the kiosk operators. These companies offer a variety of real services to their customers. As one small example, both of these chains offer a ‘Notification Service’ by which they will call or email their customers when a movie or game becomes available for rental or sale, either new or used. This builds goodwill and drives customer traffic. Sometimes a lot of small improvements at the margin add up to a much better experience.
Additionally, these chains have figured out intelligent pricing structures that appeal to the widest possible audience in a manner that still generates profits for the retailer. There is a lot that can be done with pricing to improve both customer satisfaction and profitability.
And of course there are many innovative steps the company can take to serve customers digitally, some of which they’ve started to take with Blockbuster On Demand. The combination of near ubiquitous brand awareness and strong studio relationships has the potential to make Blockbuster a dominant player in digital delivery going forward, but this path needs to be navigated intelligently to ensure success.
Davis: Finally, Carl Ichan previously spent a lot of time and money trying to win board seats and concessions from Blockbuster management. While he ultimately won, his actions haven’t seemed to help the company all that much. Even if you were to win a seat, do you think that you’d have enough influence to create the kind of change that Blockbuster needs in order to save their business?
Meyer: All I can ask for is the opportunity to have my informed opinions heard at the board level and hope that the other directors would act in a rational and objective manner in the best interests of the shareholders.
Since I’m not a Blockbuster shareholder, my vote won’t count in this contest, but I am interested in what other shareholders think, so feel free to share your thoughts in the comments. Will you be voting for Meyer? For Crystal or do you plan to kick all the bums out? While fighting a proxy war can be a distraction and could potentially interfere with Blockbuster’s efforts to restructure their debt, it can also bring hope to a weary shareholder base at a time when things seem hopeless. I don’t think that Meyer can turn the company around single handedly, but as Johann Wolfgang Von Goethe once wrote, “in all things it’s better to hope than to despair.”
Update – In an open letter to shareholders, Meyer calls out James Keyes for perpetuating the proxy contest and reveals that he encouraged Blockbuster to adopt DVD kiosk technology over five years ago. At that time he also pointed out that Blockbuster could have saved $140 million per year by cutting their store hours by three hours per day.