MOVI Bonds Crash After Artisan Signals No LBO

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By DavisFreeberg
September 14, 2006

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MOVI Gallery's bonds fell almost 5% yesterday after the third largest shareholder, Artisan Partners, reported that they had sold off their 9% stake in the company. I've argued for a longtime that equity holders no longer own MOVI and that the bond holders now control the future of the company, but the stock has been pretty volatile on rumors of LBO's and outright acquisitions by BBI or NFLX. I think that management has been trying to figure out an exit strategy for shareholders, but the bondholders have been tough in negotiating their covenants. I view this move by Artisan Partners as a clear signal that they no longer believe that the bondholders will negotiate a good faith LBO and instead intend to take over the company when MOVI inevitably declares bankruptcy at the end of this year.

Earlier this year we saw MOVI bonds rally from their low of $44.75 to a high of $81 about a month ago. Since then, the bonds have been in freefall mode and are now down to $61. (about a 24% YTM in 2012) I'm not sure how much equity bondholders would expect to get, but the loss of confidence by Artisan is a clear sign that the #3 shareholder doesn't believe that MOVI is even worth the $60 million market cap that it's currently trading at and the drop in bond prices leads me to believe that bondholders are bracing to swap their debt for equity as financials at MOVI deteriorate.

Overall, I believe that MOVI's bankruptcy will be bad for NFLX shareholders in that it has the potential to extend the life of BBI by removing a costly competitor and a bankruptcy could convince the FTC to let BBI buy MOVI stores for pennies on the dollar. When BBI was trying to buyout Hollywood Video (too bad the FTC said NO) the FTC told them that they could buy up to 1,000 of Hollywood's stores, but that more then 1,000 stores would be an anti-trust concern.

With a billion dollars in market cap now almost completely wiped out, I could see the FTC changing their tune even though it's not even two years later. If BBI can buy up stores at a discount, it could extend the life of their cash flow and increase the potential for profitability at about 30% of their stores by at least another 2 years. If MOVI bondholders sell to BBI, I think they could get .50 - .70 cents on the dollar for their bond investments today, but if MOVI bondholders choose to keep the stores instead, then I'd give MOVI a rough valuation of about $350 - 450 million without their bond debt, which could mean that we might see the bonds continue to drop back to their lows, if a buyer doesn't emerge. At this point, I'm not even sure if BBI could/would come up with the cash to buy more stores, but one thing is clear and that is that if MOVI management doesn't negotiate a peaceful transition of equity to bondholders, things are going to get pretty ugly pretty quick.

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