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Blockbuster rental chain sinks under $900m debt

Blockbuster, the DVD rental chain with 5,800 stores around the world, is expected to file for bankruptcy, marking another convulsion from the shift to online entertainment.

The company has $900m (£575m) of debt that it cannot pay because its revenues are tumbling and it is sliding further into the red, and a financial restructuring deal will wipe out shareholders and all but the most senior bondholders.

Blockbuster's fortunes have been sinking since the launch of rival services which allow users to order DVDs online and receive them through the post, such as Netflix in the US.

The advent of online streaming of films, and video-on-demand cable services, plus movie downloads from stores such as iTunes, has dealt a further blow.

Although Blockbuster has teamed up with Hollywood studios to launch services in all these areas, it has been hobbled by the costs of its extensive store network, which spans 17 countries.

In the first six months of 2010, revenues declined 16%, sending losses ballooning from $9.2m in the same period last year to $134m.

For several months, the company has been operating only with the forbearance of its lenders.

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Management and its advisors are believed to have agreed the shape of a restructuring deal, which will put the US company into Chapter 11 bankruptcy protection in the hope of continuing to operate a slimmed-down operation.

Its UK stores are already a separate legal entity, and UK management have insisted a US bankruptcy would have "no operational impact on Blockbuster UK".

Blockbuster does not operate in Northern Ireland.

Blockbuster shut more than 500 stores in the first half of this year, with a target of almost 1,000 closures, and it is understood to have agreed to increase that total by at least a further 500.

Senior bondholders - who include the corporate raider Carl Icahn - will convert some of their holdings into equity. Lower-ranking bondholders will be, in effect, wiped out.

As speculation mounted that the filing was imminent, the company said last night: "We continue to explore all of our options and are making good progress in our recapitalisation process.

"Our discussions with the studios and bondholders continue to be productive, and we have every reason to believe we will come out of the recapitalisation process financially stronger."