[Video Business]- Hollywood Video founder Mark Wattles acquired 5.7% of Blockbuster’s class A shares, saying that the largest U.S. movie-rental chain is unlikely to file for bankruptcy and will be successful in its attempt to refinance much of its debt later this year. Blockbuster’s shares surged as much as 17% today.

Wattles Capital Management and the HKW Trust he controls now owns about 6.84 million shares of Blockbuster’s class A stock, Wattles said in a Securities and Exchange Commission filing yesterday. Wattles also owns some class B shares as well as some of the company’s debt.

Earlier this month, Blockbuster said it hired law firm Kirkland & Ellis LLP to provide advice on how to address about $370 million in debt that’s scheduled to expire in August. The company later that day denied a Bloomberg News report that cited a person familiar with the situation as saying Blockbuster was exploring a possible bankruptcy. Shares of the retailer fell as much as 86% to 13¢ a share that day, before rebounding to 22¢ during regular trading and rising to 40¢ after hours.

Two weeks ago, Blockbuster said in a preliminary earnings report that its fiscal fourth-quarter U.S. same-store sales increased 4.4% from a year earlier, while its profit, excluding certain items, beat its forecast. Blockbuster reports full earnings later this week.

“Given the operating fundamentals of the Issuer combined with the short term of its real estate leases and the aggressive and proactive manner in which the Issuer has managed its store base, Mr. Wattles does not believe that the Issuer has a motive to reorganize under Chapter 11,” Wattles said in yesterday’s filing. “In addition, regardless of the likelihood of obtaining a ‘going concern’ qualification from its auditors, Mr. Wattles believes the Issuer will be successful in refinancing its revolving bank line of credit or, if it cannot,

that it will be able to use cash flow from operations to meet its August repayment obligations and 2009 liquidity needs.”

Blockbuster’s debt is becoming a concern as the company has been improving its financial performance. In November, the chain, which is shuttering underperforming stores, said it cut its fiscal third-quarter loss in half by increasing its focus on videogames, consumer electronics and rental profitability, while making plans to deepen its commitment to digital delivery.

As of Oct. 5, Blockbuster had $95 million in cash and $615 million in long-term debt, according to filings with the Securities and Exchange Commission. About $370 million of the debt is due in August, primarily with JPMorgan Chase.

Wattles founded Hollywood Video in 1988 and sold it to Movie Gallery for $1.25 billion in 2005. Weighed down by debt accumulated with the Hollywood Video purchase, Movie Gallery, the No. 2 U.S. movie-rental store chain, filed Chapter 11 in October 2007 and emerged last May.

As an activist shareholder of Circuit City, Wattles backed a Blockbuster bid for the now-bankrupt electronics chain. Blockbuster backed away from the deal after due diligence.

Blockbuster shares were up about 10% around 1:15 p.m. Eastern time today after surging as much as 17% earlier in the day.