Blockbuster flush with enough cash for 2009, source says; IPC Holdings could attract counteroffer

By Cristal Cody

Tupelo, Miss., March 3 - Although trading in Blockbuster Inc.'s stock was suspended before the markets closed on Tuesday on reports the movie rental chain was near bankruptcy, the company should have plenty of cash to make it through the year, a market source told Prospect News.

No counter bids to IPC Holdings, Ltd.'s $912 million stock purchase of Max Capital Group Ltd. are expected, though a potential bid for IPC shouldn't be ruled out, an analyst said Tuesday.

Meanwhile on Tuesday, stocks continued losses for a second day.

The Dow Jones Industrial Average lost 37.27 points, or 0.55%, to close at 6,726.02 after losing nearly 300 points a day earlier.

The Standard & Poor's 500 index sank below 700 for the first time since 1997. The index fell 4.49 points, or 0.64%, to 696.33 on Tuesday, while the Nasdaq Composite index dropped 1.84 points, or 0.14%, to close at 1,321.01.

Blockbustering for help

Blockbuster shares sank 74 cents, or 77.08%, to 22 cents before trading was stopped on Tuesday, but the fall is expected to be temporary, according to a market source.

"You'll see it - it'll open up 300% tomorrow," the source said in an interview.

The stock had traded from 72 cents to $3.68 over the past year.

Blockbuster denied reports the company plans to file for bankruptcy.

"We would be surprised if that actually happened," the source said of a bankruptcy filing. "Our cash flow predictions for the next year are more than enough to meet their obligations."

The Dallas-based company said it has hired the law firm of Kirkland & Ellis LLP to help raise capital and refinance debt.

Blockbuster plans to restructure a $328 million term loan and a revolving credit facility that are due in August.

Max stock trades at discount

Under the terms announced on Monday, Max Capital shareholders will receive 0.6429 of a share of IPC for each Max Capital share.

The deal values Max Capital at $16.34 a share, based on IPC's $25.41 closing stock price on Friday.

Shareholders aren't convinced of the deal.

Max Capital's stock lost $1.73, or 10.68%, to close at $14.47 in trading Monday.

"The relative share prices of the two companies are currently implying an exchange ratio of 0.6561, while the merger ratio is set at 0.6429," the analyst said Tuesday.

"One of the key risks to the completion of the transaction is the Max shareholders voting against the merger, as Max Capital is currently trading above the merger terms," the analyst said. "However, Max Capital appears to have a higher risk business model than IPC."

A counter bid for Max Capital is unlikely because of the company's low market share and higher risk model, but "we would not rule out the possibility of a counter bid for IPC," the analyst said.

"We believe that potential bidders with significant exposure to the casualty business or life insurance businesses with higher asset leverages would likely view IPC's lower risk business model attractive."

If IPC walks away from the deal, there is a $50 million breakup fee.

The Bermuda-based companies will operate under the Max Capital Group Ltd. name to provide specialty insurance and reinsurance services.

Shares of IPC closed on Tuesday at $22.28, down $2.41, or 9.76%.

Mentioned in this article:

Blockbuster Inc. NYSE: BBI

IPC Holdings, Ltd. Nasdaq: IPCR

Max Capital Group Ltd. Nasdaq: MXGL

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