UPDATE: Video Update Leadership Upended15 Jun, 2001 By: Joan Villa
Movie Gallery has extended its control of competitor Video Update in acourt-approved executive shuffle that ousts company founder, chairman andc.e.o. Dan Potter and Update's five-member board.
The Delaware bankruptcy court accepted Potter's resignation in a hearing with Update management June 8, along with those of chief operating officer and board member Daniel Howard and executive v.p. Richard Bedard. Companycofounder and former president John Bedard resigned earlier this year.Update filed for bankruptcy protection Sept. 18.
Morgan Keegan & Co. analyst Robert DeLean says the management changes werenecessary to advancing Update's reorganization plan, since the two teams were often at odds.
"There was no way it could work keeping the current Video Update managementteam in place," concludes DeLean, who calls the relationships of old and newmanagement “more antagonistic” than cooperative. “You have to believe that Movie Gallery's board had a large input into who those [new Video Update]directors would be. We're now at the point where they're basically in control.”
Chief restructuring officer James Skelton, whom the court appointed in December, will now serve as interim president and c.e.o. Going forward, a new three-member board will run the St. Paul, Minn.-based chain. That boardconsists of Skelton, financial turnaround expert Robert A. Baker of LosAngeles-based RAB Associates and video industry veteran John J. Jump. Jump,former executive v.p. of defunct distributor Sight & Sound, will serve aschairman. Jack Spencer, Update's c.f.o. and a Skelton associate, will alsotake on the roles of interim corporate secretary and treasurer.
The court additionally approved $5 million in new financing from Movie Gallery in the form of a debtor-in-possession agreement that will pay Update's current obligations and boost new release product in the chain's350 stores.
“We're delighted with Movie Gallery's involvement as a purchaser of bank debt and now they've stepped up to the plate with additional financing to allow us to execute our business plan,” Skelton notes. Dothan, Ala.-based Movie Gallery became Update's senior secured lender last month when itpurchased the chain's $120 million debt from a 15-bank syndicate for approximately $12 million, or 10 cents on the dollar.
Skelton says the management changes propel a final reorganization plan into the home stretch. Such a plan could be submitted within a month, according to Movie Gallery's c.f.o. J. Steven Roy. “We believe the existing management that remains is capable of handling thatprocess,” Roy adds.
DeLean says Movie Gallery is on the right track to a total acquisition of Update without overextending itself financially, as Update did when it acquired Moovies' 267 stores in March 1998. “They're doing this smart because they're buying through the bankruptcyprocess that will allow them to only keep the stores that make sense economically and that are the most profitable,” he notes.
Delean predicts the move will further bolster Gallery's stock price, which has climbed 340% since the beginning of the year to more than $14 per share. “If all this takes place and those Video Update stores get folded into the Movie Gallery company, that acquisition could be 40 or 50 cents accretive, so instead of earning $1.40 next year maybe they earn $1.80 or $1.90” infiscal 2002, he says. “Then the stock at $14 could still look cheap.”