Hollywood Entertainment agrees to buyout by Movie Gallery


Shown on Nov. 11 in Richardson, Texas, is a Hollywood Video store. It was announced Monday that Hollywood Entertainment Corp. has agreed to a buyout offer of about $850 million from smaller rival Movie Gallery Inc.

The Associated Press
Published: Tuesday, January 11, 2005 at 6:01 a.m.
Last Modified: Monday, January 10, 2005 at 11:28 p.m.
PORTLAND, Ore. - Video rental giant Hollywood Entertainment Corp. has agreed to a buyout offer of nearly $850 million from smaller rival Movie Gallery Inc. in a deal that would create a stronger challenger to the industry leader, Blockbuster Inc.
But in a sign that Wall Street is betting the fight for Hollywood Entertainment may not be over, investors pushed its shares well above the offered price.
The planned combination announced Monday of the No. 2 and No. 3 video rental chains would create a company with annual revenue of approximately $2.5 billion and approximately 4,500 stores.
That would still be a distant second to No. 1 Blockbuster which has 9,000 outlets worldwide.
The agreement comes as traditional video rental companies are locked in a price war with online pioneer Netflix Inc. and Wal-Mart Stores Inc. for rentals ordered on the Internet and delivered through the mail.
Hollywood Entertainment, based in Wilsonville, Ore., near Portland, has been looking for a buyer for several months and had attracted bids from both Movie Gallery and Blockbuster as well as from a management group.
Late last month, Blockbuster said it would launch a hostile bid for Hollywood Entertainment in January if the rival's directors failed to negotiate a deal. Blockbuster had offered $11.50 a share for Hollywood.
On Monday, Blockbuster spokesman Randy Hargrove declined to comment on the announced deal.
Under the deal announced Monday, Movie Gallery would offer $13.25 a share, or about $850 million, in cash for Hollywood Entertainment's shares. It would also assume about $350 million in Hollywood's debt in the deal.
Joe Malugen, Movie Gallery's chairman, president and CEO, said in a statement the deal would create a stronger competitor with ''a broader geographic presence and greatly improved distribution capabilities and scale.''
The offer represents a slim 1.5 percent premium over Hollywood Entertainment's closing price of $13.05 on Friday on the Nasdaq Stock Market.
Hollywood Entertainment shares climbed 80 cents, or more than 6 percent, to close at $13.85 Monday on the Nasdaq Stock Market, however, as investors wagered it would attract a higher bid. Movie Gallery shares closed up 95 cents, or almost 5 percent, at $20.02. Blockbuster shed 18 cents, or 1.9 percent, to $9.11 on the New York Stock Exchange.
''This is not the last we'll be hearing from Blockbuster,'' said Arvind Bhatia, an analyst with Southwest Securities in Dallas.
Hollywood officials said the merger with Movie Gallery offered shareholders a better deal - not only because of the higher price per share, but also because the union of the two smaller companies would face less of a challenge from regulators.
In 1999, a plan to rename Hollywood Video stores under the Blockbuster banner was stopped by the Federal Trade Commission.
''The Movie Gallery offer is a very attractive offer because it has significantly less regulatory risk than a deal with Blockbuster,'' said Daniel Burch, a Hollywood spokesman. A deal with Blockbuster, he said, would likely be stopped.
But analysts said that in a Republican administration, even a merger with the nation's top video rental chain would likely sail through.
''AT&T and Cingular just merged - and the combined entity has over 25 percent of the wireless market,'' said Michael Pachter, research analyst with Los Angeles-based Wedbush Morgan Securities. ''A combined Blockbuster and Hollywood would be under 20 percent of the home entertainment market,'' he said.
Marla Backer, an analyst with New York-based Research Associates-Soleil, agrees. ''I think there is regulatory risk, but I don't think it's insurmountable,'' she said, adding: ''It could get done, but clearly not as easily as a merger with Movie Gallery.''
Backer said Blockbuster will now have to significantly improve its latest $11.50 per share offer in order to remain competitive.
''You have to think that Blockbuster will have to really be sweeter to compensate the shareholders for the increased regulatory risk they would assume,'' she said.
In November, Dallas-based Blockbuster offered $11.50 a share for Hollywood and said early in December that it may sweeten its offer for its rival.
On Nov. 19, Movie Gallery of Dothan, Ala., said it had offered an undisclosed amount for Hollywood.
Blockbuster already has 9,000 outlets worldwide. Hollywood Video has 2,000 Hollywood Video superstore stores and more than 700 Game Crazy specialty departments. Movie Gallery has more than 2,475 outlets.
Analysts said that another advantage to the Movie Gallery merger is that fewer stores would be closed than if Hollywood was to combined with Blockbuster.
Movie Gallery maintains stores predominantly in rural areas, while Hollywood's market, like Blockbuster's, is largely in urban centers.
''Hollywood and Movie Gallery have only 10 percent overlap,'' said Pachter.
Hollywood spokesman Larry Dennedy said that the merger would not lead to closures.
Also, under the agreement with Movie Gallery, the company will remain headquartered in Oregon.
San Francisco-based David Healy, co-chair of the Merger and Aquisition Group at Fenwick & West LLP, said that the merger of the No. 2 and No. 3 companies may not help them compete better against the larger Blockbuster.
''I think it's a proven strategy for two of the smaller players to combine in order to compete with the larger player. On the other hand, they're still smaller on a combined basis than Blockbuster, so they lack the critical mass,'' said Healy. ''And it's a tough business to be in with cable offerings coming in - so it's not clear if it's two stones tying themselves together,'' he said.

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