Chapter 11 looms for Movie Gallery

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After months of financial struggles, video rental giant Movie Gallery looks set to file for Chapter 11 bankruptcy protection soon. It also plans to restructure its finances in a prenegotiated deal with key creditors.

The Wall Street Journal reported on its Web site late Friday that the nation's second-largest rental firm behind Blockbuster plans to convert its bonds into stock in the deal.

Dothan, Ala.-based Movie Gallery has been facing performance issues since outbidding Blockbuster to acquire competitor Hollywood Entertainment for $1.1 billion in 2005.

Sluggish rental trends have made it difficult for the company to stay current on its required debt payments.

In July, when it said it had $1.2 billion in debt, Movie Gallery failed to comply with terms of a senior loan, leading to Wall Street speculation of a potential Chapter 11 filing.

Since then, the company has looked to preserve cash and tried to negotiate with its lenders a financial restructuring to solve its debt troubles.

Recently, Movie Gallery said it would close about 520 underperforming Movie Gallery and Hollywood Video stores (HR 9/26). Before that, it delayed the planned launch of a DVD-by-mail subscription service.

Movie Gallery operates more than 4,600 video rental stores in North America.

Financial adviser Lazard Freres & Co. and restructuring firm Alvarez & Marsal have worked with the company as it has explored its strategic options.

A spokeswoman for Movie Gallery declined comment Friday on a possible Chapter 11 filing and the company's potential alternative plans.

The Journal said Movie Gallery is planning to file for Chapter 11 this month and could emerge from it in early 2008.
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