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WSJ: Gallery to File Chapter 11 this Month

5 Oct, 2007 By: Erik Gruenwedel

Financially challenged Movie Gallery Inc. is reportedly expected to file for bankruptcy this month. A pre-negotiated deal would allow the No. 2 video rental chain's long-term debt holders to convert their bonds into stock.

The Wall Street Journal, citing sources familiar with the negotiations, reported that Dothan, Ala.-based Gallery's $1.2 billion in debt includes $322 million in bonds, $175 million in second-lien debt and $600 million in first-lien debt.

The Chapter 11 fiscal restructuring arrangement wouldn't see Gallery emerge from bankruptcy until early 2008, according the report.

Gallery has struggled since paying $1.1 billion to acquire Hollywood Video after outbidding Blockbuster Inc. in 2005.

Michael Pachter, media analyst with Wedbush Morgan Securities, said the second-lien holders and bond-holders will receive the stock in hopes Gallery's fortunes rebound following restructuring.

“What this means is that Gallery as we know it is gone,” Pachter said. “It doesn't mean [all] the stores are gone. Somebody is going to run the assets and try to figure out how best to monetize them.”

He said options include shuttering additional stores, selling properties to private equities companies and running it as an ongoing concern.

Pachter doubted holders of first-lien debt would be patient enough to earn back their debt in quarterly operating income. He said they would probably force a sale.

“[Gallery] stores unburdened by debt might be attractive to someone,” he said.

He added that current stockholders would be wiped out by this financial reorganization.

A representative from Gallery was not immediately available for comment.

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