Movie Gallery files chapter 11


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Video-rental chain Movie Gallery filed for bankruptcy Tuesday, succumbing to a mountain of debt incurred when it bought rival Hollywood Entertainment for $1 billion in 2005.

Movie Gallery, under severe competition from online rental services, said it filed for protection under Chapter 11 of the bankruptcy code in U.S. Bankruptcy Court for the Eastern District of Virginia.

"Movie Gallery needs to realign its cost structure due to the ongoing changes in our industry," Joe Malugen, chairman and chief executive of Movie Gallery, said in a statement.

The company also said private investment fund Sopris Capital Advisors LLC agreed to finance a reorganization of the company's debt under the bankruptcy supervision. The plan, which requires court approval, would refinance Movie Gallery's debt. It also would cancel outstanding shares in the company, but give existing equity holders the chance to receive about 2% of the company's new equity.

Movie Gallery is also seeking permission to receive $150 million from Goldman Sachs to finance operations during the bankruptcy proceedings.

The company, under heavy competition from online rental companies, said in August it could not make timely interest payments and would likely receive default notices from lenders. Standard & Poor's Ratings Services cut the company's corporate credit rating to junk-bond status in September.

They didn't go to the online or mail service fast enough, and there aren't enough people going into the stores anymore. This is just a case of a company becoming obsolete without them realizing it. The times were changing and they didn't change with it. Buying Hollywood Entertainment was a horrible move.

I predict lots of store closings, and more emphasis on online rentals.

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