Movie Gallery fails to meet credit facility

Chain considers strategic, restructuring alternatives

By Cindy Spielvogel -- Video Business, 7/2/2007

JULY 2 | UPDATE: Movie Gallery reported that, due to a softer-than-expected second quarter, it was unable to meet the terms of its credit facility for the quarter ended July 1.

The company is discussing with its lenders whether it will be able to remedy the defaults by seeking a waiver, amendment or forbearance.

Movie Gallery has rehired Bill Kosturos, a managing director at restructuring and corporate advisory firm Alvarez & Marsal, as chief restructuring officer. The firm was retained by Movie Gallery last year to assist with some financial concerns and will now serve in an expanded role to help the company look at strategic and restructuring alternatives.

Movie Gallery said it will consider divesting assets, recapitalization, alliance with strategic partners and a sale or merger. It also plans to accelerate store closings and realign its cost structure to better reflect its reduced size.

The company said it “plans to operate its business without interruption while it engages in discussions with its lenders and evaluates strategic and restructuring alternatives.”

To do so, Movie Gallery said it has fully drawn the remainder of its credit revolver and has $50 million cash on hand.

The announcement was released after the closing bell on Wall Street. Movie Gallery’s stock had closed at $1.89 but fell in after-hours trading to below $1.

Movie Gallery said it would meet with its lenders July 3 but hadn’t announced an outcome of those talks publicly by the end of the business day.

Movie Gallery said it would not comment on the situation beyond its July 2 announcement.

Michael Pachter, research analyst with Wedbush Morgan securities, said he thinks there’s a better than average chance that Movie Gallery could declare bankruptcy.

“I think it’s in the best interest of the senior secured credit holders to take control and compel a bankruptcy,” he said.

At the company’s current rate of earnings, Pachter believes it will be difficult for the company to pay off its debt, which he put at $1.3 billion. A bankruptcy would likely result in the company being sold off “in pieces,” he said.

Although possibilities still exist that would take Movie Gallery out of its slump, “the management team has taken too long” to produce results, Pachter said. He said the company’s downfall came from intensified competition from Blockbuster and Netflix.

Another analyst said he believed that although Movie Gallery's lenders may give the company a temporary reprieve on its credit facility, it probably won't be enough to avert a bankruptcy. He believes Movie Gallery met its downfall in acquiring Hollywood Entertainment, whose stores compete closely with Blockbuster, and not rising soon enough to the challenge of competing in online rentals.

Movie Gallery recently announced a plan to get into online rentals, but it was probably too late, the analyst said.