Things aren't looking good for video rental chain Movie Gallery (Nasdaq: MOVI). Shares plunged last night -- shedding more than half their value -- after the company announced that it was in default of its debt covenants and was considering strategic alternatives that may include an outright sale of the company.
Normally, investors rally around companies that put themselves up on the bidding block. Movie Gallery's gloomy reality is that no one has any idea as to who would be brave enough to try to right the wrongs at this fading dinosaur.
Movie Gallery had a good run through the 1990s. Renting videos was a lucrative endeavor in a highly fragmented sector. Consolidation, especially with Movie Gallery's rural emphasis, was a breeze. Then it bit off more than it could chew when it acquired the huge Hollywood Video chain.
It's been all downhill for Movie Gallery since then. Yes, the company still watches over the country's second-largest chain at 4,600 locations. However, it failed to follow Blockbuster (NYSE: BBI) in introducing a Web-based home delivery service. It also bet on throwback distribution platforms like its flick-spewing vending machines and the dated technology of set-top distributor MovieBeam.
Tack on disintegrating fundamentals at the store level, and you're left to wonder why bulls felt that this could lead to a happy Hollywood ending. False hope would puff up the shares whenever buyout rumors would swirl about or when the company began leasing space within its stores. But those were hollow cries for help.
So now that the company is running out of cash, can a suitor really step in to save the day? If so, it will probably be someone in the private sector. Blockbuster has its hands full at the moment. You can't expect retailers like Best Buy (NYSE: BBY) or Hastings (Nasdaq: HAST) to step up, even at bargain prices.
If Movie Gallery finds a buyer -- and that's a Rubenesque "if" -- it will be a turnaround expert who can give it a shot behind closed doors, away from the accountability of public scrutiny every three months. Unfortunately for current shareholders, private equity firms are smart bidders. With the possibility of bankruptcy looming larger, they are likely to wait until the filing takes place. With shares zeroed out and creditors cashed out for pennies on the dollar, that is the ideal time for vultures to raise their bidding cards.
Some other Foolish headlines to get investors through the misery:
Best Buy is an active recommendation in the
Motley Fool Stock Advisor
newsletter service. Kick the tires for free with a 30-day trial subscription.
Longtime Fool contributor Rick Munarriz hasn't stepped into a Hollywood Video store in about a dozen years. He does not own shares in any of the stocks in this story. He is also part of the
Rule Breakers
newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
Terms & Conditions
RSS Headlines
Fool UK