Novice Investing - Movie Gallery In The Dump

Date: Monday 01st 2008f December 2008 05:29:16 PM

Movie Gallery In The Dump - 06/08/2006

By: Novice Investing Staff

Movie Gallery (MOVI) along with competitors Blockbuster Inc. (BBI) has been limping around for the past year, exchanging blow with each other and with online DVD rental outfit, Netflix Inc. (NFLX). Yesterday 6th of June 2006, MOVI shot 17% higher on takeover rumor, presumably with Blockbuster or Netflix.

Well, we don't feel neither is likely to happen. First, Blockbuster was rejected when trying to buy the then Holywood Entertainment Inc. for anti-trust concern. Movie Gallery ended up buying Holywood Entertainment. Thus, a buyout buy Blockbuster Inc. is remote. How about Netflix? It doesn't make sense either. Netflix is firing in all cylinders in the cyberspace. They have proven that consumers prefer renting DVD online than getting up off their couch and walk to the nearest Movie Gallery. Now, they intend to acquire Movie Gallery for its bloated cost and dwindling sales?

No no no. What Netflix would probably do is to expand their presence online and concentrate on the next big thing which probably is video on demand. Blockbuster too, is too busy to fend off Netflix's attack online and its declining store sales offline. It might in fact have a better chance of survival by teaming up with an online company or reduce its store count.

So, who would want to buy Movie Gallery? Before the run up, it has $ 200 Million in market capitalization with a long term debt of $ 1.08 Billion, $ 775 Million will be due within this year. Now, looking at MOVI's cash balance, there is no chance whatsoever of this company paying off its current long-term debt due. The next logical thing for MOVI management to do is to roll the debt over and pay a higher interest rate. At this point, MOVI is in the mercy of its lenders. Would they extend the loan with higher interest?

Well, let's see. If they think that MOVI is in good shape, there is chance that they will extend the loan. But, if they want to, they can reject MOVI's request to extend the loan. They can then force MOVI into bankruptcy and

sell off MOVI's valuable assets at a profit. Sounds familiar? Actually, these were what happened to the formerly bankrupt Worldcom and K-Mart. Both went into bankruptcy proceedings and then issued new shares a few years later, only to be bought at higher price by other companies.

You see, if there were chance that Movie Gallery will be acquired, it is most likely after it goes into bankruptcy court. At that point, potential acquirers (be it Blockbuster or Netflix) can get a better deal than buying the struggling Movie Gallery now. Yep, you heard it right. Acquirers can get the type of assets they want without having to worry about employees or servicing Movie Gallery's huge long term debt.

With Movie Gallery shares rising due to takeover speculation, it is interesting to watch who will be interested in this piece. As investors, we won't buy Movie Gallery other than speculative buy. The risk outweighs the reward. But hey, there are lots of savvy risk takers out there who will consider Movie Gallery as an investment. So, the takeover speculation may not be over yet.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Movie Gallery Inc. (MOVI) or any other securities.

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