Blockbuster nearly doubled EBITDA under Keyes — then Lehman killed the refinancing

In a Fortune essay, former CEO James Keyes recounts taking over Blockbuster in July 2007 and finding a covenant violation and cash crisis in his first week — after the decision to kill late fees had already surrendered $80 million of EBITDA in the war with Netflix, on top of more than $1 billion of debt. He negotiated forgiveness of the violation on the strength of a new transformation plan: buying MovieLink, a streaming service created by five of the six major studios with over 3,000 titles, and renaming it Blockbuster OnDemand.

Combined with 'Total Access' — entertainment across more than 5,000 stores, Blockbuster By Mail, kiosks and OnDemand — Keyes says the company announced strong net earnings and nearly doubled EBITDA in its third-quarter 2008 results, and won a two-notch Moody's upgrade. But a third of its $1 billion debt fell due in 2009, and Moody's warned that post-Lehman uncertainty had raised Blockbuster's probability of default.

Keyes says there was no cash runway to refinance and keep investing, so the board declined a five-year, $500 million Viacom deal for exclusive streaming rights to over 60% of older movies; a Google partnership pairing YouTube with Blockbuster for paid content also stalled. After the Los Angeles Times reported a bankruptcy rumour, studios cut Blockbuster's credit terms from 90 days to cash, pulling nearly $300 million of float out within weeks, in his account.

Keyes credits a final collaboration — Dish Network's acquisition of the company through restructuring — with letting the brand 'live to fight another day', while noting that for a transformation, cash management is job number one: 'during turbulent times and financial market volatility, cash will always be king'.

Strong net earnings and nearly doubled EBITDA in Q3 2008, per Keyes, with Total Access spanning 5,000 stores, by-mail, kiosks and OnDemand.

The late-fee surrender had already cut $80 million of EBITDA before Keyes arrived, deepening the debt burden.

Total Access matched Netflix's convenience while adding stores and kiosks, and MovieLink out-listed Netflix's nascent streaming.

The 2008 credit collapse made refinancing a third of $1 billion effectively impossible, whatever the operating results.

The board's refusal of the $500 million Viacom exclusivity left Netflix free to lock up streaming content.

A working transformation can still die in the debt market: when refinancing and the pivot compete for cash, the pivot loses and the lenders win.

Dish Network acquired Blockbuster through restructuring, keeping the brand alive as a shell of its former scale. Keyes frames both his 7-Eleven and Blockbuster tenures with the same lesson — cash management is job number one, and 'during turbulent times and financial market volatility, cash will always be king'. All figures here are as he reports them in the essay.