Movie Gallery Inc.
(NDAQ:MOVI) shares plummeted today after the rental chain finally
declared bankruptcy just two and a half years after winning a takeover
battle for a major rival. The news comes as no big surprise to
shareholders who saw warning signs back in late June.
Movie
Gallery filed for Chapter 11 bankruptcy today in hopes that it can
slash its debt by $400 million and reorganize itself into a new public
entity. The chain still operates nearly 4,500 stores after it acquired
Hollywood Video in April 2005 for $1.25 billion and the assumption of
$350 million in debt.
Many analysts remain skeptical as to
whether or not the company can emerge from bankruptcy and remain a
viable competitor in the increasingly difficult rental space. Tight
competition from satellite and cable providers along with online rental
services like Netflix and Blockbuster's new service. However, Movie
Gallery did unveil plans in March to enter the online business.
Movie
Gallery also has a lot of restructuring ahead of itself before it can
go through with the Chapter 11 process. The company said it would close
nearly 520 rental stores two weeks after it said it would miss interest
payments on second-lien debt and 9.625% senior notes.
"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," said chief executive Joe Malugen.
In the end,
common stock shareholders will likely end up losing all of their
investment as shares in the new company will be distributed to
creditors. However, the new public entity may be a good investment
opportunity if it is priced correctly. Usually, creditors will begin
selling their stock immediately and create a discount. Combined, these
factors make MOVI a stock
worth watching!
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