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Movie Gallery Completes Video Update Acquisition

28 Dec, 2001 By: Joan Villa

Video Update's 320 remaining stores have made it through a "long and tough" bankruptcy process to emerge as a fully-owned subsidiary of Movie Gallery, the nation's No. 3 rental chain.

The deal increases Movie Gallery's store base by almost 30 percent, from 1,090 to 1,410 locations in 41 states and five Canadian provinces.

"We are excited about the court's approval of Video Update's plan of reorganization," says Movie Gallery's chairman and c.e.o. Joe Malugen. "The bankruptcy process for the nearly 4,000 associates of Video Update has been long and tough, and we appreciate their attitude and efforts and look forward to adding them to the Movie Gallery family."

Video Update headquarters will be relocated from St. Paul, Minn., to Movie Gallery offices in Dothan, Ala. The acquisition is expected to be accretive to Movie Gallery earnings beginning in the first quarter, adding a projected $95 million to $105 million in revenues and $10 to $12 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in fiscal 2002, Malugen says.

Judge Judith Wizmur accepted the reorganization plan during a day-long hearing yesterday in U.S. Bankruptcy Court in Delaware, but voided the contracts of Video Update's largest franchisee, operating 14 stores in Virginia and nine in southern New Hampshire. At issue was how Movie Gallery would take over Video Update franchisee contracts, particularly when some Movie Gallery stores are already located within the exclusive territories guaranteed by the contracts' noncompete clauses. The two parties had simply "run out of time" in finding a solution, explains the franchisee, William J. Busching.

"It really came down to future growth and territory issues," Busching says. "Movie Gallery, being a public company, wishes to expand, and us being a franchisee who has expanded over the past 15 years, we wish to continue to do that, and that was the main issue that we could not reach common ground on."

Some of Video Update's other dozen or so franchisees either had contracts voided or converted into licensee agreements that allow them to keep the Video Update name, Busching says. His stores, based in Williamsburg, Va., will cease using the Video Update moniker and convert to new store names as soon as he receives trademark clearances, he adds. Now that he is not bound by a franchisee contract, he says he may also pursue selling the locations to Movie Gallery or another party.

"We left the courtroom with that on the table," he notes.

Video Update filed for Chapter 11 bankruptcy protection in September 2000, listing total assets of $129.5 million against debts of $210 million. The 450-store chain quickly closed more than 100 underperforming locations, and worked with studios to renegotiate purchase contracts in order to replenish new release movie inventory in many stores that had been understocked due to the chain's precarious finances.

In May 2001, Movie Gallery took over as Update's senior secured creditor when it purchased 92 percent of the outstanding $121 million bank debt for about $8.5 million from a syndicate of financial institutions led by BNP Paribas, according to Movie Gallery filings with the Securities & Exchange Commission. That move gave Movie Gallery influence over the reorganization plan and ultimately allowed the chain to take over all or part of Update's remaining locations.

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