Movie Gallery Extends Control Over Video Update; Potter Out11 Jun, 2001 By: Joan Villa
Movie Gallery has extended its control of competitor Video Update by winning court approval of an executive shuffle that ousts company founder, chairman and c.e.o. Dan Potter and Update’s five-member board.
The Delaware bankruptcy court accepted Potter’s resignation in a hearing brought by Update management June 8, along with those of c.o.o. and board member Daniel Howard and executive v.p. Richard Bedard. Company co-founder and former president John Bedard resigned earlier this year. Update filed for bankruptcy protection Sept. 18.
Morgan Keegan & Co. analyst Robert DeLean says the management changes were necessary to advancing Update’s reorganization plan, since the two teams were often at odds.
"There was no way it could work keeping the current Video Update management team in place," concludes DeLean, who calls the relationships of old and new management "more antagonistic" than cooperative. "You have to believe that Movie Gallery’s board had a large input into who those [new Video Update] directors would be. We’re now at the point where they’re basically in control."
Chief restructuring officer James Skelton, appointed by the court in December, will now serve as interim president and c.e.o. Going forward, the St. Paul, Minn.-based chain will be run by a new three-member board consisting of Skelton, financial turnaround expert Robert A. Baker of Los Angeles-based RAB Associates, and video industry veteran John J. Jump. Jump, former executive v.p. of defunct distributor Sight & Sound, will serve as chairman. Jack Spencer, Update’s c.f.o. and Skelton associate, will also take on the roles of interim corporate secretary and treasurer.
The court additionally approved $5 million in new financing from Movie Gallery in the form of a debtor-in-possession agreement that will pay Update’s current obligations and boost new release product in the chain’s 350 stores.
"We’re delighted with Movie Gallery’s involvement as a purchaser of bank debt and now they’ve stepped up to the plate with additional financing to allow us to execute our business plan," Skelton notes. Dothan, Ala.-based Movie Gallery became Update’s senior secured lender last month when it purchased the chain’s $120 million debt from a 15-bank syndicate for approximately $12 million, or 10 cents on the dollar.
Skelton says the management changes propel a final reorganization plan into the "home stretch." Such a plan could be submitted within a month, according to Movie Gallery’s c.f.o. J. Steven Roy.
"We believe that the existing management that remains is capable of handling that process," Roy adds.
DeLean says Movie Gallery is "on the right track" toward a total acquisition of Update, accomplished without overextending itself financially, as Update did when it acquired Moovies’ 267 stores in March, 1998. "They're doing this smart because buying through the bankruptcy process will allow them to only keep the stores that make sense economically and that are the most profitable," he notes.
Delean predicts the move will further bolster Gallery’s stock price, which has climbed 340% since the beginning of the year to more than $14 per share. "If all this takes place and those Video Update stores get folded into the Movie Gallery company, that acquisition could be 40 or 50 cents accretive, so instead of earning $1.40 next year maybe they earn $1.80 or $1.90" in fiscal 2002, he says. "Then the stock at $14 could still look cheap."