Acquisition Sinks Movie Gallery

The company files for bankruptcy two years after buying rival Hollywood Entertainment for $1 billion, digging a hole it never recovered from.
Stephen TaubOctober 16, 2007

The country’s second-largest movie rental company, Movie Gallery, Inc., has filed for Chapter 11 bankruptcy protection and agreed to a restructuring plan with private investment fund Sopris Capital Advisors.

Under the arrangement, Sopris will invest $50 million of new capital and convert more than $70 million of second lien debt. Movie Gallery also is seeking approval for $150 million in debtor-in-possession financing from Goldman Sachs Credit Partners. The DIP financing will consist of a $50 million revolving loan and a $100 million term loan.

The company’s problems are traced to a huge amount of debt incurred when it bought Hollywood Entertainment for $1 billion in 2005. At the end of the July 1 quarter, the company had nearly $1.2 billion in debt , dwarfing total assets of $892 million, including just $45 million in cash and cash equivalents.

Under the restructuring plan, Movie Gallery will convert $325 million of 11 percent senior notes and other general unsecured claims into new equity of the reorganized company. It also will convert about $72 million of the company’s $175 million second lien debt, held by Sopris, into new equity of the reorganized Movie Gallery.

Sopris also agreed to backstop a $50 million equity rights offering to be made available to holders of the 11 percent senior notes.

As is usually the case with bankruptcies, under the proposal existing shares of common stock will be cancelled.

The proposed reorganization plan would reduce the company’s total debt by about $400 million, according to the company.

“Movie Gallery needs to re-align its cost structure due to the ongoing changes in our industry,” said Joe Malugen, the company’s chairman, president and CEO. “Although the company has taken numerous steps to reduce its debt and strengthen its balance sheet through closing unprofitable stores, headcount reductions and other means, these actions were not sufficient to offset the significant shift in our business and the cost of our substantial debt obligations. After careful consideration of all available alternatives, the company’s board of directors determined that a Chapter 11 filing was a necessary and prudent step and the best way to obtain the financing necessary to maintain regular operations and allow for a successful restructuring.”

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