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Blockbuster Bankruptcy Weeks Away?

(Blockbuster article updated with analyst commentary.)

NEW YORK (TheStreet) -- It looks like Blockbuster (BLOKA.PK) investors' worst fear may come true. The movie rental chain could be gearing up for a bankruptcy filing next month, according to reports.

Blockbuster and its senior debt holders had a meeting last week with six major movie studios discussing their intention to enter a preplanned bankruptcy, the Los Angeles Times reported, citing sources familiar with the matter.

It would be essential for Blockbuster to retain the support of movie studios amid a bankruptcy filing, in order to ensure receiving new releases and continue business uninterrupted.

A preplanned bankruptcy, which the Los Angeles Times said would last about five months, would allow Blockbuster to escape leases at some of its underperforming stores. This could mean the closure of another 500 to 800 locations.

The flailing retailer is due to repay $42 million from its mounting $1 billion in debt on Sept. 30, but if this reports proves true, the prepackaged bankruptcy would come as soon as mid-September. Blockbuster had already postponed the payment two times.

"The company does not have enough assets to cover its debt, and debt is superior to equity in bankruptcy," says Wedbush analyst Micael Pachter. "This is not a liquidation, so shareholders won't be wiped out, but in the reorganization, it's unlikely that shareholders will get much more than a hope that the company can recover, repay all of its debt, and return to a positive equity value."

Eventually, however, Pachter does believe all equity holders will be wiped out.

So what should remaining Blockbuster investors do? Given the low chance of Blockbuster recovery, it might be best to cut the loss and get out.

But for those who are convinced that Blockbuster has a future, conceivably the company could repay its debt and there could be something left for shareholders, Pachter says.

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