Looks Like The End Is Near For Movie Gallery

Jul. 3.07 | About: Movie Gallery (MVGRQ)

Shares of video rental chain Movie Gallery (MOVI) are cratering Tuesday morning, after the company Monday night announced that it can’t meet the financial covenants for its senior credit facility for the quarter ended July 1. The company said it is in talks with lenders on the situation and working with them to develop a plan to remedy the defaults, which could include seeking a waiver.

Movie Gallery said business has deteriorated in recent months; it is considering a variety of alternatives, including the potential sale of the company.

The company has named Bill Kosturos, of the restructuring and corporate advisory firm Alvarez & Marsal, as chief restructuring officer. Among other tasks, the firm will help the company “evaluate strategic and restructuring alternatives.” The company also has hired Lazard Freres as a financial advisor.

Movie Gallery said it continues to operates its business while talking with lenders and considering alternatives; it has drawn the remaining cash available on its revolve, and has about $50 million in cash on hand. The company said it will move to conserve cash and improve profitability by closing unprofitable stores, consolidating stores in certain markets, realigning costs and “seeking a more competitive capital structure.”

Movie Gallery said it will consider asset divestitures, recapitalizations, alliances with strategic partners, and a sale to or merger with a third party.

CEO Joe Malugen said in a statement that the company’s results for the first two months of the year were ahead of plan, but that the company in the most recent four months has reflected “a sharp decline” in rental business, “which has put unexpected pressure on our financial performance.”

Movie Gallery shares Tuesday morning are down $1.45, or 77%, at 44 cents.