The acquisition will expand Movie Gallery's operations to 1,410stores in 41 states and five Canadian provinces. Movie Galleryplans to keep Video Update's name, run it as asubsidiary andmaintain 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% andgives the company entrée to the Canadian market and severaladditional states, according to Joe Malugen, chairman and chiefexecutive officer of Movie Gallery. He expects the Video Updatestores will add $95 million to $105 million in revenues and $10million to $12 million in earnings before taxes, depreciation andamortization 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 agroup of lenders headed by Banque Paribas. In buying that debt fromBanque Paribas, Movie Gallery became first in line to be paid fromthe assets of the St. Paul-based video rental chain. Because thedebt outweighed the company's assets, it was able to work out adeal to take over the company.