Movie Gallery in talks with lenders
EmptyMovie Gallery Inc. said Monday it has failed to meet terms of its senior credit facility, sending its stock below $1 a share and triggering speculation that the movie rental chain was on the verge of bankruptcy.
Movie Gallery, which has seen same-store sales plunge for the past year as it loses market share to online DVD rentals, said it was in talks with its lenders on a possible waiver, amendment, forbearance or similar agreement.
"During the last four months, we, like most of the industry, have experienced a sharp decline in our rental business, which has put unexpected pressure on our financial performance," Movie Gallery Chief Executive Joe Malugen said in a statement. "We are actively pursuing every avenue to restore the financial soundness of the company."
In a securities filing, the second-largest store-based U.S. movie rental company said it had set up a conference call with its lenders for Tuesday morning.
Wedbush Morgan analyst Michael Pachter said a bankruptcy filing would appear "imminent" if primary creditor JP Morgan wants a quick fix, such as selling off the company to satisfy debtholders.
"Bankruptcy is a very real possibility if the creditors see a deteriorating business and they don't see a high probability of getting paid," Pachter said, but added that "the lenders may decide it's better to give these guys some looser terms and let them work it out over time."
The company said it would accelerate store closures and consolidations and may put itself up for sale. It has fully drawn the remaining availability of its credit revolver and has about $50 million of cash on hand.
In February, Movie Gallery got $900 million in funding to refinance its entire senior secured credit facility to help it avoid bankruptcy after it emerged from a year-long respite from some provisions of those credit agreements.
Movie Gallery, whose market capitalization dropped late Monday to about $27 million, has total liabilities of $1.4 billion, according to Reuters data.
The Dothan, Alabama-based company said it had experienced a sharp decline in its rental business for the past four months.
Larger rival Blockbuster Inc. told its own lenders in a presentation last week that same-store rental revenues industrywide had declined at a rate of 15.7% during the second quarter, according to a financial filing.
Industry analysts have predicted that in-store rental revenue will continue to decline at a compound annual rate of 1.1% through 2011, as consumers migrate to online rental services such as that of market leader Netflix Inc.
In-store losses appear to have accelerated since Blockbuster launched its Total Access program, which allows online customers to swap DVDs at its stores.
Blockbuster clocked online growth of more than 1 million subscribers in seven months -- customers that likely came from Movie Gallery, Pachter said.
"I don't think this is a case of mismanagement by Movie Gallery. Movie Gallery is the innocent civilian casualty of the bloody battle between Netflix and Blockbuster," Pachter said.
Movie Gallery said it would operate without interruption while it talks with lenders and evaluates its strategic and restructuring alternatives.
Movie Gallery said Alvarez & Marsal, the restructuring and advisory firm it hired last year, has expanded its role to help the company evaluate available strategic and restructuring alternatives. Bill Kosturos, a managing director at Alvarez & Marsal, has resumed the role of chief restructuring officer.
The company Sunday hired Lazard Freres & Co. LLC to serve as an independent financial adviser.
Shares of Movie Gallery were down 58% at $0.79 in after-hours trade Monday after closing at $1.89 on Nasdaq.