Movie Gallery, the video rental chain based in Dothan, Ala., tapped the leveraged loan and high-yield markets for $1.195 billion in financing to back the $1.25 billion acquisition of Hollywood Entertainment Corp. Wachovia Securities and Merrill Lynch led $870 million of senior debt while the company also issued $325 million of senior notes due 2012.
Originally the lenders went out for $720 million, but the capital structure was altered midway through syndication with the bank portion of the debt increased. The credit now comprises a $75 million revolver, with a $25 million accordion feature, a $95 million "A" loan and a $700 million "B" loan. The five-year pro rata is priced at LIBOR plus 2 3/4% and the six-year, institutional tranche is priced at LIBOR Plus 3%. The bonds meanwhile, which were also led by CIBC World Markets, priced wider-than expected at 11%.
Thomas Johnson, Movie Gallery's senior v.p. of corporate finance and business development, blamed the General Motors situation for weakening demand for high-yield securities. "GM has kind of spooked the market." He declined to say where Movie Gallery thought the bonds would price, but he said the company did consider other alternatives beyond the high-yield market. A larger credit facility beyond $1 billion was not feasible and convertibles were ruled out because it would dilute shareholder value, he said. Management owns 20% of the company's shares.
The acquisition of Hollywood, its former rival, makes Movie Gallery the country's second largest video rental company behind Blockbuster with 2,543 stores in North America. CIBC, Bank of America, Calyon, Erste Bank, Dresdner Bank and First Tennessee National Bank are in the credit.