NEW YORK — Wildly courted video retailer Hollywood Entertainment greenlit a buyout offer Monday worth about $850 million — or $13.25 a share — from smaller rival Movie Gallery in a deal that would create a strong No. 2 in the marketplace and, at least momentarily, slam the door on overtures from giant Blockbuster, which has been aggressively pursuing Hollywood Entertainment.
Movie Gallery, which made an undisclosed and presumably lower offer for Hollywood Entertainment in November, was the dark horse in the race for the current second-place video chain.
Hollywood Entertainment last year inked a $10.25-per-share sale in principle to a group of buyers led by equity firm Leonard Green & Partners and including Hollywood Video’s chairman-CEO, Mark Wattles.
Blockbuster, unable to gain traction in its own negotiations, threatened in late December to launch a public tender offer for Hollywood Video shares unless the company agreed to talk. Blockbuster was offering $11.50 a share but said it would likely up that number after a closer look at Hollywood Video’s financials.
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Meanwhile, billionaire corporate raider Carl Icahn bought up hefty stakes in both Hollywood Video and Blockbuster and encouraged the merger. Icahn didn’t return calls to his New York office.
Monday’s news seemed to have temporarily stumped Blockbuster. The stock dipped 1.83% to $9.12.
“In the next short period of time, we will assess our options — I can’t tell you today exactly what we’ll do,” the company’s chairman-CEO, John Antioco, said to investors at a media conference Monday.
“We would still love to acquire Hollywood Video,” he said. “That would be No. 1 on our radar screen. … But we won’t pay more than we believe the company is worth.”
He didn’t volunteer what he thought that number was. “We haven’t seen the merger agreement yet,” he added. “We don’t know what the breakup fees are. We’re not sure whether we’ll be able to get into the process.”
(Breakup fees, to discourage fickle dealmaking, are what either party in a transaction owes the other for reneging and can be quite substantial.)
Still, in a sign that some investors expect a bidding war, Hollywood Entertainment shares surged 6.21% from Friday to close at $13.86 — well above the 1.5% premium in Movie Gallery’s offer.
Movie Gallery shares firmed 4.98% to $20.02.
Hollywood Entertainment said the termination of the merger agreement with Carso Holdings (a unit of Leonard Green & Partners) will require a payment by Hollywood for Carso’s transaction expenses up to a maximum of $4 million, but will not require Hollywood to pay a termination fee.
The company also said it settled on the deal through an auction process launched last year and led by a special committee of independent directors of the board.
Antioco, during the conference, insisted a Blockbuster merger would offer Hollywood Video far more synergies than a Movie Gallery deal.
But Wall Streeters and Hollywood execs stressed the Movie Gallery offer carries significantly less regulatory risk than a deal with Blockbuster.
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.”
Movie Gallery operates in more rural markets than do the top two larger chains.