Blockbuster seeks funds, not bankruptcy

Video rental chain retains law firm to help raise funds. Shares plunge 77% on reports of possible filing.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Blockbuster Inc., whose video rental stores have been pressured by the growing online market, said Tuesday it has hired a law firm to help find ways to raise capital, but that it does not intend to file for bankruptcy.

"We have hired Kirkland & Ellis for assistance with our ongoing finance and capital-raising initaive," said Karen Raskopf, Blockbuster spokeswoman. "We do not intend to file for bankruptcy."

Raskopf also said the company was in the process of searching for a financial adviser, but has not selected a firm to work with.

Shares of Blockbuster (BBI, Fortune 500) plunged more than 77% Tuesday, and the New York Stock Exchange halted trading, amid reports that the company had hired legal counsel for a bankruptcy filing. The stock closed at 22 cents.

An analyst indicated in a research note that Blockbuster was seeking out legal advice to pursue bankruptcy.

"Blockbuster was reported to have hired legal counsel to explore bankruptcy filing," wrote analyst Kim Noland of the fixed-income company Gimme Credit LLC in a research note.

Blockbuster and rival Netflix (NFLX) have been in a price wars for the online DVD rental business, but Blockbuster has been slower to get on the wagon.

Blockbuster will announce its fourth-quarter results for 2008 on March 19.

Concern over Blockbuster's financial health sent shares of Netflix surging almost 6% Tuesday.

In the research note, Noland said "it is difficult to predict a possible turnaround for the slumping in-store rental business."

Noland also wrote "although Blockbuster had done a decent job recently of containing costs and bolstering liquidity, we are concerned that the company's recent quarter (fourth fiscal quarter) was much worse than we expected." To top of page

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