If you can't find a copy of Neil Simon's Chapter Two at a Movie Gallery (Nasdaq: MOVI) near you, why don't you skip ahead to Chapter 11? The troubled DVD rental chain is about to file for bankruptcy reorganization, according to The Wall Street Journal.
Shares were off by as much as 51% this morning, with shareholders realizing that even though the company may bounce back, it may happen only after creditors have wiped the current shares off the book. Yes, it can happen.
The Journal indicates that the deal may involve creditors swapping their debt for stock, but even that scenario would be highly dilutive to current shareholders. The company's balance sheet is weighed down by $1.2 billion in debt.
It's not as if investors didn't see this coming. The company has asked to extend its forbearance agreement with creditors three times since July. To help move the makeover process along, Movie Gallery is closing 520 unprofitable Movie Gallery and Hollywood Video stores.
Wiggling its way out of unattractive leases for even more stores is probably part of the bankruptcy filing process.
We know who loses here. Are there any winners? Of course. If a Movie Gallery store closes, it doesn't mean the end of the rental consumption process for the locals. They will simply migrate to the nearest Blockbuster (NYSE: BBI) or Hastings (Nasdaq: HAST), or to one of the few mom-and-pop shops that are still in business.
Many of the Movie Gallery locations were in rural markets, probably prompting users to flock to online services like Netflix (Nasdaq: NFLX) and Blockbuster's Total Access to deliver fresh rentals by mail.
Fewer physical storefronts may be the push to help the digitally delivered flicks offered by companies like Apple (Nasdaq: AAPL) and Amazon.com (Nasdaq: AMZN). The move may also help unmanned kiosk-based systems like Redbox, which is branching out in select McDonald's (NYSE: MCD) locations.
The winners may not enjoy the benefits right away. Movie Gallery still has roughly 4,000 units in operation. There is always the chance that the leaner chain that emerges out of bankruptcy reorganization may learn some new tricks to become relevant again.
Don't think that's likely to happen? Join the club. It was nice knowing you, Movie Gallery. If only you could go back in time and undo the purchase of Hollywood Video.
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