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Movie Gallery Files Bankruptcy for the Second Time

3 Feb, 2010 By: Erik Gruenwedel

As expected, Movie Gallery Inc., the No. 2 DVD rental service in the country and owner of Hollywood Video, filed for Chapter 11 bankruptcy protection, the second such filing since 2007.

Wilsonville, Ore.-based Gallery, which made the filing late Tuesday with U.S. bankruptcy court in Eastern Virginia, said it plans to immediately shutter 760 underperforming stores, about 30% of the chain’s 2,400 locations. The company anticipates closing additional stores during the Chapter 11 proceedings.

Gallery, in a court filing, said revenue fell $600 million to $1.4 billion in 2009, from $2 billion in 2008, with a fourth-quarter operating loss of $129 million, up 52% from an operating loss of $85 million in 2008.

More importantly, privately held Gallery said it owed more than $540 million to lenders, including nearly $45 million to Hollywood studios and distributors, and was behind or in default on loan payments.

“Absent the filing of these Chapter 11 cases and the corresponding ability to exit a substantial number of underperforming stores, and further deleverage its capital structure, the company likely would not be able to continue as a going concern,” said Steve Moore, chief restructuring officer, in the filing.

Gallery said it hired Gordon Brothers Group to help with liquidation of affected stores, in addition to retaining investment banker Moelis & Co.

Among studio creditors, Warner Home Video is owed more than $9.5 million, followed by Sony Pictures Home Entertainment at $9.3 million and 20th Century Fox Home Entertainment with $8.2 million.

Other studio lenders include Universal Studios Home Entertainment ($7.7 million), Paramount Home Entertainment ($6.9 million), distributor VPD ($2.9 million), Starz Home Entertainment ($645,000) and Image Entertainment ($351,000).

Gallery also owes video game publishers, including Electronic Arts, Microsoft, Sony and Activision, collectively about $5.5 million.

The chain’s first bankruptcy occurred as a publicly traded entity based in Dothan, Ala., following the disastrous $1.1 billion acquisition of Hollywood Video, which included assuming the chain's $380 million in debt. That deal was supposed to elevate Gallery from a successful southern rural operation to the national stage with more than 4,800 stores in North America competing against Blockbuster.

Private equity firm Sopris Capital Associates LLC emerged thereafter as the principle stakeholder, with Gallery founder and CEO Joe Malugen exiting the company.

Despite the new owners, Gallery has never adapted to the rapidly evolving rental market, including implementing by-mail subscriptions such as Netflix, rental kiosks spearheaded by Redbox and electronic distribution platforms.

“Gallery has no answer to Netflix and Redbox and will likely continue to struggle as the consumer movie rental habits change,” said Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles.


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