Wattles plan may spur FTC to OK 'Buster effort

The tenacious bidding war for Hollywood Entertainment appeared to turn in Blockbuster’s favor Tuesday, with recently departed Hollywood topper Mark Wattles saying he’d play hero and buy up enough Hollywood stores to keep competition alive.

That may just convince the Federal Trade Commission to allow Blockbuster’s hostile takeover of Hollywood. The contours of a possible compromise emerged just as the five FTC commissioners met behind closed doors Tuesday to approve or reject the Blockbuster bid.

The FTC, which has already blessed Movie Gallery’s offer to snap up Hollywood, has fretted that a Blockbuster-Hollywood merger would stifle competition and has considered going to court to block such nuptials.

FTC commissioners adjourned the meeting without announcing any action — a sign, Wall Streeters feel, that the agency is looking for a way to avoid a potentially costly courtroom showdown with Blockbuster, which has vowed to fight the FTC.

Shares of Blockbuster shot up nearly 5% in a flurry of trading just before the bell.

At the same time, Movie Gallery shares dipped, also in heavy trading.

One possible scenario would be for Blockbuster to dispose of some number of Hollywood stores after the merger in markets where the two are the only major vidtailers in town.

Wattles is offering to buy up to 1,000 of Hollywood’s roughly 2,000 stores if that made Blockbuster’s bid more palatable to the FTC.

In a filing with the Securities and Exchange Commission, Wattles said he has secured preliminary commitments from financial backers and that he is working with investment banker Challenger Capital Group.

“I and/or entities I control are interested in acquiring up to 50% of the Hollywood stores. I would be willing to limit the stores purchased to those that are most competitive with Blockbuster,” Wattles said in a letter to Blockbuster chair-CEO John Antioco.

Wattles has held discussions with Antioco, as well as with billionaire corporate raider Carl Icahn, who owns large stakes in both Hollywood and Blockbuster.

Icahn had previously indicated that he favored Blockbuster’s bid.

Wattles’ filing was apparently timed to coincide with the expiration of the FTC’s formal review period for the Blockbuster bid. Review period ended Monday without action by the agency, leaving Blockbuster legally free to go ahead with its takeover.

As a practical matter, however, the FTC has until Thursday to ask a court to block the deal. That’s the day Blockbuster plans to close on its $14.50-a-share tender offer for Hollywood’s stock.

Although Wattles left Hollywood in February after a failed bid to buy the chain himself, he still owns nearly 6.2 million shares of the company, giving him a keen interest in whether Blockbuster or Movie Gallery ends up acquiring his old outfit.

Movie Gallery signed a definitive merger agreement with Hollywood in January, while Wattles was still chairman-CEO, with a buyout price of $13.25 a share.

Wattles stands to gain

The difference between Blockbuster’s offer and Movie Gallery’s could be worth as much as $7.75 million to Wattles, although presumably some or all of that would get plowed into buying the Hollywood stores back from Blockbuster.

In its own filing with the SEC, Hollywood’s board set April 22 as the date for a special meeting of shareholders to vote on the Movie Gallery offer. The board sent out a final proxy statement to shareholders Friday recommending they vote in favor of the deal.

If that happens before Blockbuster can gain approval for its bid, then the Blockbuster offer would become moot.

Given that pressure, Blockbuster is likely to try to force a showdown with the FTC in court this week if it can’t work out a compromise.

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