B’buster bid off table

Vidtailer opts out on Hollywood

WASHINGTON — Blockbuster withdrew its hostile bid for Hollywood Entertainment on Friday after failing to work out a deal with federal regulators that would have allowed the merger of the nation’s two largest rental chains to go forward.

Move would seem to end the long-running battle for control of Hollywood begun last year when former chairman-CEO Mark Wattles attempted to take the company private in a leveraged buyout. Although Wattles was unsuccessful in his bid, the move put the publicly traded Hollywood in play, which quickly attracted the interest of Blockbuster and rival suitor Movie Gallery.

With Blockbuster now out of the running, Movie Gallery’s $13.25 a share merger deal is all but certain to receive approval from Hollywood’s shareholders at a special meeting called to vote on the proposal April 22. The Movie Gallery deal has already received antitrust clearance from federal regulators.

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Blockbuster had been at odds with the Federal Trade Commission over the possible anticompetitive effects of its proposed merger with Hollywood. More than half of the 2,100 Hollywood Video stores are located within two miles of Blockbuster locations, raising the prospect that the combined chains could control video rental prices in those markets. In 1999, the FTC shot down an earlier merger proposal by Blockbuster and Hollywood on similar grounds.

“Our decision not to extend our offer was reached after a careful review of all of the available facts and circumstances,” Blockbuster CEO John Antioco said in a statement. “Among those things that played prominently for us were Hollywood’s recent public filings and the unlikely resolution of our request for regulatory clearance on an acceptable timetable. Given the current circumstances, in our judgment it is not in Blockbuster’s best interest to continue to pursue the acquisition.”

Antioco’s reference to recent public filings by Hollywood was an apparent allusion to its 10-K annual report filed with the Securities and Exchange Commission on March 18. That filing cleared the way for Hollywood to call a special shareholder meeting, which started a new regulatory clock ticking for Blockbuster.

Once Hollywood shareholders approve Movie Gallery’s offer, Blockbuster’s bid would become moot. That meant Blockbuster needed to work out a deal with the FTC before then that would allay the agency’s concerns.

Alternately, it could have tried to provoke a legal showdown with the agency and hope for a favorable court ruling that would allow it to go ahead with its bid.

In its dealings with the FTC, Blockbuster had argued that the video industry has changed dramatically since 1999 and that its competition now comes as much from the likes of Wal-Mart and Best Buy, which sell millions of low-priced DVDs, as from other rental stores.

FTC staffers seemed skeptical of that analysis, but Blockbuster and the agency held conversations last week to see if a compromise might be worked out to allow the company’s bid for Hollywood to go forward.

Earlier in the week, Wattles re-entered the fray, declaring in a filing with the SEC that he was interested in acquiring up to half of Hollywood’s stores if that made a merger with Blockbuster more palatable to the FTC. Wattles said he was willing to limit his purchases to those stores that most directly compete head-to-head with Blockbuster locations.

But with Blockbuster’s Friday announcement that it was dropping its bid, those negotiations appeared unsuccessful.

“We believe that Movie Gallery’s definitive agreement to acquire Hollywood is in the best interests of Hollywood’s shareholders, employees and customers,” Movie Gallery CEO Joe Malugen said in the wake of Blockbuster’s announcement. “Our combined company will be the second largest North American video rental company with annual revenue of approximately $2.6 billion. …With a broader geographic presence and greatly improved distribution capabilities and scale, our combined company will be a strong competitor, well positioned for continued success in urban, suburban and rural markets.”

With the markets closed on March 25 in observance of Good Friday, traders on Wall Street were unable to react to the news. The resumption of trading on Monday is likely to bring a sharp selloff of Hollywood’s shares, which closed March 24 at $14.13, nearly a dollar higher than Movie Gallery’s merger offer.

In recent weeks, traders had been betting that Blockbuster would be able to work out a deal with regulators that would allow its $14.50-a-share offer for Hollywood to go ahead.

In a note to clients, Wall Street analyst Dennis McAlpine warned that Movie Gallery could face a daunting integration challenge.

“As for Movie Gallery, the old adage ‘Beware of what you wish for because it may come true’ now comes into play,” McAlpine wrote. “It does look as though (Movie Gallery) will end up with a lot more and larger stores to take care of. Now it must lay out a plan of what it is going to do and then execute it.”

(Paul Sweeting is a reporter for Daily Variety sister publication DVD Exclusive.)