Movie Gallery files for Chapter 11

Secures $140 million to manage business, pay bills

Devastated by online competition and buried beneath debt, Movie Gallery said Tuesday that it has filed for Chapter 11 bankruptcy protection.

Movie Gallery, which took on at least $1.1 billion in debt two years ago when it purchased Hollywood Video, lists about $892 million in assets and $1.4 billion in debt.

It hasn't been determined how much money Movie Gallery owes to the film studios that provide DVDs to its stores. The company, however, said that it is "in advanced negotiations with a number of the major motion picture studios." It added that it has sought "permission from the bankruptcy court to enter into agreements with the studios to restore normal credit terms."

Its bankruptcy plan will convert $400 million in debt to equity and has investment fund Sopris Capital Advisors financing a reorganization of debt. Plus, outstanding shares in the company would be canceled, and existing holders of equity would receive about 2% of the company's new equity.

Late on Tuesday, Movie Gallery also got interim bankruptcy court approval to access $140 million of $150 million in debtor-in-possession financing arranged by Goldman Sachs, which will help Movie Gallery to continue managing its business and pay its bills.

Movie Gallery operates 4,430 stores in U.S. and Canada under the names Movie Gallery, Hollywood Video and Game Crazy, though the Canadian operations are not included in the bankruptcy plan.

In announcing the plan, which had been expected for the past week, Movie Gallery said that "vendors should expect to be paid for post-petition purchases of goods and services in the ordinary course of business." The company also has asked for court permission "to continue to honor its current customer policies regarding merchandise returns and outstanding gift cards and customer loyalty programs."

Movie Gallery, which in March paid about $10 million for the VOD company MovieBeam, said last month that it will close more than 500 unprofitable stores; analysts think that number will more than double.

Wedbush Morgan Securities analyst Michael Pachter predicted Movie Gallery would sell the profitable Hollywood Video stores to one buyer and the unprofitable ones on the cheap to another, possibly sector giant Blockbuster, while current management would maintain control of the Movie Gallery stores.

The analyst also said bad news for Movie Gallery should enrich shareholders of Blockbuster and Netflix. On Monday, he upgraded Netflix shares to "buy" and took his price target from $18 to $30. On Tuesday, he upgraded Blockbuster to "strong buy" and took his target from $6 to $8.

Blockbuster shares rose 1.5% on Tuesday to $5.40, and Netflix shares were up a penny to $23.97. Movie Gallery lost 25% to 21 cents.

Two years ago, about the time Movie Gallery was competing with Blockbuster for the right to buy Hollywood Video, its shares traded north of $30.