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The rental company announced yesterday that it will be holding a special auction to sell off its operation to the highest bidder. The company decided to hold an auction after a "stalking horse" bidder, Cobalt Video Holdco, came along and offered management $290 million for its U.S. and international subsidies, Blockbuster said. That $290 million fee, which Blockbuster agreed to in an asset-purchase arrangement, will be used as the minimum amount that management will accept from any bidder.

However, there are several factors at play before Blockbuster can hold an auction for its sale. For one, the company is in Chapter 11 bankruptcy, for which it filed a petition in September. It now needs to receive authorization by the U.S. Bankruptcy Court for the Southern District of New York to hold an auction. Along the way, it is also trying to "accelerate" its movement through bankruptcy.

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The 25-year-old company filed for bankruptcy yesterday in New York after losing sales to Netflix Inc.’s Web and mail-order movie service and Coinstar Inc.’s Redbox DVD rental kiosks. Revenue dropped 20 percent to $4.06 billion last year, when Dallas-based Blockbuster reported a $558.2 million net loss.

As of Aug. 29, Blockbuster had about 5,600 stores worldwide, including 3,300 in the U.S., according to court papers. Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles, said the company may have to cut U.S. locations to about 2,000 to increase annual sales per store to at least $1 million. In 2002, that figure stood at $1.1 million, he said.

“No one can predict what the market will look like for them going forward as Netflix and Redbox continue to take market share, so they are shooting in the dark,” Pachter said. The company will also face pressure to cut stores from “a new class of shareholder wanting to see cash increasing in a hurry,” he said.

In the past two years, Blockbuster has closed 1,061 U.S. company-operated stores, according to a court document. All its U.S. operations, including stores, DVD vending kiosks, mail and digital, will continue to operate normally, the company said.