Fund Buys 13% Stake in Movie Gallery (MOVI)

From Insider Score: New 10% Owner/Continued Institutional Buying for Movie Gallery (MOVI): A hedge fund that concentrates on special situation investing in financially troubled and distressed clients has increased its stake in Movie Gallery (MOVI), buying the stock on the same day that its value gapped more than 50% higher on stronger-than-expected earnings.

Schultze Asset Management ("SAM") disclosed May 17th that it now holds an approximately 4.27M-share, or 13.4%, stake in MOVI, up from a 2.77M-share, or 8.6%, stake on April 26th. The firm upped its stake by purchasing 1.5M shares of MOVI at $5.22 on May 11th, and it is now MOVI's largest shareholder.

In its original Form 13D filing, SAM said that it wants to help MOVI reduce its debt.

"SAM intends to contact management and/or the board of directors of [MOVI] to propose a number of possible shareholder value-enhancing steps. Such steps may include, but are not limited to, a shareholder rights offering to raise funds from existing shareholders. The possible shareholder rights offering may serve to raise capital from existing shareholders in an effort to reduce bank and/or bond debt so that future interest expense may be lowered and/or to raise cash for general corporate purposes," the firm said.

MOVI, which has been granted relief by creditors in recent months, greeted the news warmly.

"We welcome the perspective of all of our shareholders. MOVI is actively looking at ways to strengthen its balance sheet and improve its capital structure," a company spokesman told Reuters on April 26th.

Last week, MOVI surprised Wall Street, posting Q1 net income of $40.3M, or $1.27 per share, up from $18.4M, or 58 cents per share, a year ago, and embarrassing the 15 cents EPS consensus pegged by analysts. MOVI's revenue came in at $694.4M, up from just $233.8M a year earlier, boosted by the company's acquisition of Hollywood Entertainment. Executives on the company's conference call also said that they would be "receptive" to a potential merger with rival Blockbuster (BBI).

MOVI shares gapped as high as $5.35 in the wake of earnings, a more than 69% rise from the previous day's close, and the stock posted a more than 51% gain by the time the day was over. The stock, however, has been as volatile as ever, dropping more than -15% on Monday, then gaining back 9% yesterday. In mid-day trading today, the stock is up more than 10.5%, perhaps boosted by the news of SAM's buying (though the stock opened this morning almost -20% lower than SAM's recent buy price).