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Movie Gallery Purchases Remainder of Hollywood Video

26 Sep, 2005 By: Holly J. Wagner

Movie Gallery will buy the last vestiges of Hollywood Video from the company's former CEO Mark Wattles under a clause in the contract to buy the rest of the chain, and the company borrowed some extra money to do it.

The sale was disclosed in a filing with the Securities and Exchange Commission (SEC). Under the terms of the Hollywood Video chain acquisition, Wattles had the right to require that Movie Gallery buy the 20 stores he personally owns and operates.

The chain amended its $870 million credit facility to allow another $50 million of borrowing and increased its revolving letter-of-credit sublimit from $30 million to $40 million without increasing the overall revolving credit line. The amendment also relaxes the required ratio levels under the financial covenants in the credit facility.

To win the amendments, Movie Gallery agreed to pay an extra one-quarter percent in interest to lenders that consented to the new terms. The company also agreed to other prepayment protections for the lenders.

A portion of the funds available to Movie Gallery under new debt agreement will be used to buy the stores from Wattles.

Wedbush Morgan Securities analyst Michael Pachter maintained his buy rating and $24 price target for shares of Movie Gallery.

“We estimate that the increased interest rate will add $5 million per year in interest expense and expect the additional debt to add another $4 million per year in interest expense,” he wrote. “While we acknowledge that the higher interest will impact our estimates, we are maintaining our estimates for the time being pending better visibility and financial guidance from the company.”

Pachter said the debt might put drag on earnings for the 2006 fiscal year, but he still expects $2 per share in earnings for the year.

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