Movie Gallery, Video Update Merger Closing

ST. PAUL, MN-Movie Gallery’s plan to take over Video Update’s network of 320 video rental stores is expected to be completed today following bankruptcy court approval of Video Update’s plan of reorganization. A Delaware federal bankruptcy judge has approved a Chapter 11 reorganization plan was confirmed this week by the United States Bankruptcy Court.

The acquisition will expand Movie Gallery’s operations to 1,410 stores in 41 states and five Canadian provinces. Movie Gallery plans to keep Video Update’s name, run it as asubsidiary and maintain the chain’s existing stores, including 33 in Minnesota. Before the merger, Movie Gallery had stores in 31 states.

The deal increases Movie Gallery’s store base by about 30% and gives the company entrée to the Canadian market and several additional states, according to Joe Malugen, chairman and chief executive officer of Movie Gallery. He expects the Video Update stores will add $95 million to $105 million in revenues and $10 million to $12 million in earnings before taxes, depreciation and amortization to the company’s fiscal 2002 operating results.

Earlier this year, Movie Gallery paid less than $10 million for $121 million in senior secured debt that Video Update owed to a group of lenders headed by Banque Paribas. In buying that debt from Banque Paribas, Movie Gallery became first in line to be paid from the assets of the St. Paul-based video rental chain. Because the debt outweighed the company’s assets, it was able to work out a deal to take over the company.

Just three years ago, Video Update had more than 675 stores — No. 3 in the industry to Blockbuster and Hollywood Entertainment at the time. But that growth was in part due to its purchase of Moovies, a 269-store chain based in South Carolina; that dealalso proved to be a significant factor in the company’s undoing. The merger swamped Video Update with debt and strained its management resources at a time of increasing competition and uncertainty for the video rental industry.

Movie Gallery, based in Dothan, AL, owes its success to dominating the small markets ignored by such industry behemoths as Blockbuster and Hollywood Entertainment.