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Movie Gallery Files for Bankruptcy

16 Oct, 2007 By: Erik Gruenwedel

The company has been shuttering Movie Gallery and Hollywood Video stores leading up to the bankrupcy filing.

As expected, Movie Gallery Inc. Oct. 16 filed Chapter 11 fiscal reorganization in U.S. Bankruptcy Court in Virginia as part of a pre-negotiated debt-restructuring plan.

The Dothan, Ala.-based No. 2 video rental company, which has struggled financially following its acquisition of Hollywood Video in 2005, will maintain operations, including current payroll and employee benefits during the restructuring.

Gallery's Canadian unit was not part of the Chapter 11 filing.

In the filing, Gallery listed debt at more than $1.4 billion with assets of more than $890 million.

Among more than $45 million owed home entertainment creditors, Gallery is on the hook to Paramount Home Entertainment for $11.1 million; Sony Pictures Home Entertainment for $10.9 million; 20th Century Fox Home Entertainment for $7.6 million; Warner Home Video for $6.9 million; Universal Studios Home Entertainment for $5 million; distributor VPD for $3.6 million; Lionsgate for $2.2 million; First Look Home Entertainment for $1 million; Starz/Anchor Bay Entertainment for $219,669 and Magnolia Home Entertainment for $161,491.

As part of the purposed restructuring, Gallery entered into a financing deal with private equity firm Sopris Capital Advisors for $50 million in new capital in addition to the conversion of more than $70 million of second lien (bond) debt.

The company is seeking to borrow $150 million under a debtor-in-possession financing deal with Goldman Sachs Credit Partners.

If approved by the bankruptcy court, Gallery would convert $325 million 11% senior notes (bonds) and other unsecured debt into equity in a new restructured Gallery.

The rental company's $600 million in first lien debt would remain while seeking a revised interest rate for the $105 million of the remaining second lien debt.

Current common stock holders would receive a 2% minority interest in the restructured company.

“Movie Gallery needs to re-align its cost structure due to the ongoing changes in our industry,” said Joe Malugen, chairman, president and CEO of Gallery, in a statement.

“Although the company has taken numerous steps to reduce its debt … these actions were not sufficient to offset the significant shift in our business and the cost of our substantial debt obligations.”

Independent media analyst Dennis McAlpine said pre-packaged bankruptcy filings have become the norm in big business, often as an attempt to mitigate the stigma attached to bankruptcy.

He believed the filing occurred largely due to certain creditors, including leaseholders at more than 4,000 store locations that refused to renegotiate the leases.

Gallery last month said it would shutter more than 500 locations.

“They obviously couldn't get all leases closed that they wanted,” McAlpine said.

He said the advantage to a pre-packaged bankruptcy is that the company is question has lenders and a course of action lined up, thereby reducing the burden on the court.

“You've got [most of] the creditors to agree what the debt restructuring will be and the equity holders have agreed to whatever haircut they are going to take,” McAlpine said.

The analyst said Gallery would likely shutter more than the previously mentioned 500 stores, which he said would likely send consumers to rival Blockbuster.

McAlpine said pinning the Gallery's woes on the $1.1 billion purchase of Hollywood Video is only part of the picture. He said the industry's shift toward online rentals caught Gallery unprepared.

He believes the store closures would help Blockbuster more than online rental pioneer Netflix.

Separately, Wedbush Morgan Securities analyst Michael Pachter, prior to the Gallery filing, issued a report upgrading Blockbuster's stock to a “strong buy” from “buy.”

He said despite his belief that the No. 1 video rental company's Total Access subscription service lost as many as 150,000 members in the third quarter, Blockbuster will grow its profits “dramatically” as a result of the Gallery bankruptcy.

“We expect the surge in Blockbuster comps from Gallery customer defections to embolden new [Blockbuster] management to make the changes necessary to return to consistent profitability,” Pachter said in a research note.

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