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UPDATE: Movie Gallery Acquires 26 Stores

11 Sep, 2001 By: Joan Villa

Advancing toward its target of opening or acquiring 75 new locations this year, Movie Gallery has purchased 26 stores in a bid to expand the chain's presence in its existing rural and suburban markets.

Premiere Video sold the Dothan, Ala.-based retailer nine stores in Alabama, while 14 Ohio locations and two Michigan stores were purchased from Video Connection, according to Movie Gallery c.f.o. J. Steven Roy. Another single store was purchased in Indiana. Gallery now claims 1,083 locations in 31 states, after adding 52 locations in 2001's first half.

Chairman and c.e.o. Joe Malugen said the transactions “provide further evidence of the continuing opportunities we have to expand in existing or contiguous markets” and are expected to generate accretive earnings for the nation's No. 3 rental chain.

The retailer is also in the midst of acquiring some 300 stores from bankrupt competitor Video Update, based in Minneapolis, after purchasing 90% of the chain's bank debt in May and supporting a reorganization plan filed last month that would make Update a wholly owned Gallery subsidiary. That deal would boost Gallery's presence to 1,400 stores in 40 states.

While in the past the company has preferred to build rather than acquire locations, Roy says it will pursue purchasing at the right price. Video Update, for example, cost just over $11 million to take over bank debt and provide a debtor-in-possession loan, averaging about $37,000 per location. However, the company still must decide whether to change signage and bring those stores and other acquisitions under the Movie Gallery moniker.

“Any time you do an acquisition it's an assimilation risk,” notes Morgan Keegan analyst Robert DeLean. However, DeLean says Gallery has been successful in the smaller markets that Blockbuster has not penetrated, giving the chain a unique competitive edge even without a national name presence or large-scale advertising campaign.

“We have this world where those that participate in revenue-sharing programs are going to win, and the mom-and-pops are going to go away, so for Movie Gallery, why not play in those small markets where Blockbuster doesn't feel it's worthwhile putting in stores?” says DeLean.

Movie Gallery's shares closed at $15.61 on Sept. 10, the last day stocks were traded before the terrorist attacks on the World Trade Center and the Pentagon shut down financial markets for most of last week. Company shares split 3-for-2 on Aug. 31.

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