Suit seeks to scuttle buyout

Action claims co.'s board breached fiduciary duties

NEW YORK — Not all shareholders are happy about the proposed $14 a share management buyout of second-ranked vid chain Hollywood Entertainment.

On Friday, company disclosed that its board of directors and top execs are being sued for accepting an inadequate takeover offer. Lawsuit, filed by an undisclosed plaintiff, claims the Hollywood board breached its fiduciary duties by accepting the offer from private investment firm Leonard Green & Partners, which was also named as a defendant, the company said.

Lawsuit alleges that the price agreed is “unfair and inadequate.” The class action group is asking, among other things, that the transaction be halted.

The offer represented a 30% premium on Hollywood shares at the time the deal was announced last week, valuing the equity at more than $880 million. Including assumption of debt, total deal is valued at around $1.2 billion. The $14 offer represents some five times Hollywood’s projected 2004 earnings, on par with trading values of other video companies. Some analysts said the timing of the offer — in the perennially weak video month of March — may have depressed the company’s value.

Hollywood believes the lawsuit “is without merit and intends to respond accordingly.” Company also noted that at least one other lawsuit relating to the proposed merger may be forthcoming.

LGP has committed some $220 million to buy $150 million of Hollywood preferred shares and some $70 million in common stock to give it a 50% equity stake in the newly constituted company. Hollywood chairman and CEO Mark Wattles will control the other 50%.

Investment bank UBS has committed $1.075 billion in debt financing to back the deal.

Ratings agency Moody’s warned the company of possible downgrades on its long-term debt pending a review of its capital structure post merger. Moody’s will also be looking at the impact of increased competition from alternative retail video channels, continued pressure on the rentals from DVD sell-through and new technologies such as video-on-demand.

Company operates 1,920 Hollywood Video stores in 47 U.S. states as well as nearly 600 Game Crazy videogame stores. Company reported $1.7 billion in total sales last year.

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