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Movie Gallery Gets Control of Video Update

8 May, 2001 By: Joan Villa

Movie Gallery purchased bankrupt Video Update’s $121 million bank debt last week for under $12 million in a surprise move that gives the nation’s number three rental retailer control of its competitor’s 350 stores.

Technically the transaction is not a store buyout, but a purchase of bank debt that substitutes Movie Gallery for a 15-bank syndicate led by BNP Paribas as Video Update’s largest secured creditor.

“Ultimately this puts us in the position, if we desire, to own and operate anywhere from zero to all of those stores,” explains J. Steven Roy, Movie Gallery’s executive v.p. and c.f.o.

The Dothan, Ala.-based chain owns 1,036 stores in 31 states, third behind Hollywood Entertainment’s 1,816 stores and Blockbuster’s more than 5,000 domestic locations.

The change gives Video Update another two to four months to submit its reorganization plan to the bankruptcy court. Meanwhile, Movie Gallery will evaluate Update operations. Unsecured creditors will have to work with Movie Gallery to design a viable plan to bring Update out of bankruptcy. The senior secured creditor also has the right to impose restrictions on the use of its cash that could include management agreements and forced liquidations or sales of stores. Roy declined comment on potential personnel changes.

Roy notes that the company’s intent and the long-term goal behind the purchase “is the success, viability and growth of the video business,” and that, unlike previous lenders, the chain brings retail experience to the table. One of the first things on Movie Gallery’s agenda is to propose a working capital facility from Movie Gallery to Video Update that would pay current obligations and improve Update’s product selection, he says.

Any stores taken over by Movie Gallery would require additional cash payments to cover liabilities, Roy says, and that would be addressed in the chain’s reorganization plan. Also undecided is whether acquired stores would be converted to the Movie Gallery name, which could hinge on the value of the Update brand, Roy says.

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