Unexpected move pits chain against Blockbuster

WASHINGTON, D.C. — The bidding war for Hollywood Entertainment became a three-way affair Friday when Dothan, Ala.-based Movie Gallery announced it has delivered an “acquisition proposal” to the special committee of Hollywood’s board.

Terms of the proposal were not disclosed.

Unexpected move pits No. 3 rental chain Movie Gallery against market leader Blockbuster in the quest to acquire Hollywood, the No. 2 chain.

Hollywood chairman-CEO Mark Wattles also is seeking to buy the company and take it private with backing from investment bank Leonard Green & Partners.

Wattles and Leonard Green began the bidding in March with an offer of $14 a share, but later lowered their bid to $10.25 a share, citing changes in “industry and market conditions.” Blockbuster then threw a wrench into Wattles’ plans by offering $11.50 a share for the company on Nov. 11.

Since then, shares of Hollywood have traded around $12, indicating investors expected additional bids to emerge.

But few expected one from Movie Gallery, which has pursued a longtime strategy of avoiding direct competition with Blockbuster and Hollywood as much as possible by locating stores in smaller markets less likely to attract its larger rivals. Should Movie Gallery end up in control of Hollywood, it would inherit a chain of nearly 1,900 stores, half of which are within a three-mile radius of a Blockbuster.

News of Movie Gallery’s interest sent shares of Hollywood up again in early trading Friday, to about $12.25.

But the fact that Movie Gallery did not disclose the terms of its offer led some analysts to speculate it may not be any higher than Blockbuster’s $11.50 a share bid.

In a statement, Movie Gallery officials said they did not believe a Blockbuster/Hollywood merger would pass antitrust scrutiny, suggesting they do not feel a need to outbid Blockbuster.

“Blockbuster’s proposed acquisition would create a dominant player with significant competitive overlap in the vast majority of markets served by Blockbuster and Hollywood Entertainment,” Movie Gallery CEO Joe Malugen said. “We also believe our proposal presents no antitrust risk.”

Retail analyst Dennis McAlpine of McAlpine Associates said he read Malugen’s statement as an indication that Movie Gallery plans to fight it out with Blockbuster on the regulatory front rather than on Wall Street.

“Typically the (Federal Trade Commission) doesn’t object to things unless someone tells them there’s something to object to. I think Movie Gallery just told them,” McAlpine said.

In its statement Movie Gallery said its proposal is “fully financed” and would be immediately accretive to earnings. That suggested to McAlpine the offer could be in stock rather than cash.

Both Blockbuster’s bid and Wattles’ offer are for cash.

In a statement Friday, Blockbuster disputed suggestions that its offer to buy Hollywood faced insurmountable regulatory hurdles.

“We believe our proposal should be allowed to proceed through an orderly process of negotiations and regulatory review,” Blockbuster said. “Our proposal includes a 12% premium over the offer that was on the table and would result in a combined company that would have only approximately 20% of the homevideo business.”

A Blockbuster spokeswoman said the 20% figure was based on Blockbuster’s and Hollywood’s combined revenue from movies and an estimated $24 billion total video rental and sell-through market this year.

Federal regulators have blocked past attempts to combine Blockbuster and Hollywood, however. Analysts have speculated that Blockbuster would close a sizable number of Hollywood stores, particularly where they’re adjacent to Blockbuster outlets, which could have the effect of reducing competition in those markets.

Hollywood officials did not return calls seeking comment.

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