US retail DVD rental specialist Movie Gallery has filed for Chapter 11 bankruptcy and re-organization, just months after its stock fell to under $0.50 cents, had Nasdaq delisting proceedings against it and defaulted several times on chunks of debt. We said back in August that Chapter 11 was its natural next step.
We have given scant coverage to Movie Gallery over the past few years, one of the key US rivals to Blockbuster in the US, which is still hell bent on trying to make money out of the moribund process of renting DVDs through retail stores.
Already Netflix has shown that there is a better way, in online DVD rental delivering online-selected DVDs through the post and allowing consumers to keep four or five at a time with no late fees.
We noted that Blockbuster was denied a consolidation in that market by Movie Gallery, when back in March 2005, as Blockbuster was first released from Viacom ownership, it bid $1 billion for rival Hollywood Entertainment, which instead was acquired by Movie Gallery.
Whoever the investors and debt specialists were who paid the bills for that consolidation, they are paying the price now for not seeing the inevitable transition from retail DVD rental to online DVD rental to paid video downloads to advertising supported video viewing which will one day see all retail DVD rentals bankrupt.
Movie Gallery’s most recent move was to acknowledge that the future was online, and acquire the fated Moviebeam business, which began as part of Disney, they waded through some venture capital money before being bought by Movie Gallery for $10 million, in a move that was far too late to save it, in March.
MovieBeam was just the wrong choice. Over a three year period it ate up $100 million of Disney’s money, and then proceeded to eat a further $48.5 million from an investment group that included Cisco and Intel. Buying that service to get itself out of a cash hole was never going to work for Movie Gallery and with set tops costing $250, a service activation fee being $30 and movies rented at prices between $3.99 and $1.99, it was always going to be either a slow burner, or a business subsidized by Movie Gallery, a move it simply couldn’t afford.
Now it has filed for debt relief under Chapter 11 in the Bankruptcy Court for the Eastern District of Virginia, Richmond Division, to give it time to re-align its operations and restructure debt. Shareholders are almost certain to end up with nothing, as the company today is probably not worth its debts, not once the online video markets go through their next iterations in the coming 12 months.
Movie Gallery said it has agreed to a restructuring plan with Sopris Capital Advisors, a private investment fund, which will now need to be approved by the Bankruptcy Court. This plan would provide for converting almost $400 million of its first two tiers of debt into equity, and call for other debt to lower interest levels, with existing common stock being cancelled.
Movie Gallery will run the business on a $150 million debtor-in-possession financing agreement arranged by Goldman Sachs Credit Partners to refinance its revolving credit With that much debt being converted Movie Gallery thinks it should now become cash positive, and that’s probably true ‘until retail DVD rental trading gets worse, which it will. The company has already closed unprofitable stores and cut headcount but this was not sufficient to turn the corner.
We have talked before about the concept of the Faultline where major corporations were mining rich seams in market that are dying due to the shift to digital content and this is an example of exactly that in action, complete with the company’s inability to respond because it wants to save the old business it was in. It will need a lot more than $150 million and ridding itself of interest to turn itself into a new online company.
For the first quarter Movie Gallery revenues fell 6.7% to $648 million, and operating income and EBITDA both halved. The company said it will work to exit bankruptcy as quickly as it can, but left its Canadian subsidiary operating outside of Chapter 11.