Vidtailers in hostile territory

B'buster takes aim at H'wood

NEW YORK — Giant vidtailer Blockbuster made good Wednesday on its threat to launch a hostile takeover of Hollywood Entertainment, the No. 2 video chain that last month announced plans to merge with smaller rival Movie Gallery.

Blockbuster offered $14.50 a share to buy Wilsonville, Ore.-based Hollywood Entertainment in a deal worth $1.3 billion, a 9.4% premium to Movie Gallery’s $13.25 a share bid.

In a hostile takeover, a company goes over the heads of its target’s management and board, directly to shareholders. The offer to Hollywood stockholders will begin Friday and continue through March 11, unless extended by Blockbuster.

Blockbuster, based in Dallas, is hoping the higher price and greater economy of scale it offers will trump the previous deal.

Some of Wall Street’s big guns agree. Financier Carl Icahn has large stakes in Blockbuster and Hollywood Video, and he backs a merger.

Blockbuster offered to buy Hollywood earlier this year for $11.50 per share but consistently said it would up the price if Hollywood would sit down at the table and negotiate. That never happened, and Hollywood instead announced it would be acquired by Dothan, Ala.-based Movie Gallery.

Blockbuster’s offer includes $11.50 in cash and $3 worth of Blockbuster stock.

It remains to be seen whether Movie Gallery will up its bid — or whether other suitors emerge. In that case, Blockbuster said in a filing with the Securities and Exchange Commission, it might raise its offer again.

A Movie Gallery rep didn’t return calls for comment.

Blockbuster, which owns about 9,000 stores worldwide, said buying Hollywood would immediately improve its earnings per share and cash flow.

A combination of Hollywood Entertainment and Movie Gallery would create a chain with about 4,500 stores and annual revenue of about $2.5 billion.

“We believe this transaction will provide tremendous value to both Blockbuster and Hollywood shareholders and should better position Blockbuster to compete in the rapidly changing home entertainment marketplace,” Blockbuster chairman and CEO John Antioco said.

The homevideo business has been under siege by competition from large retailers, video-on-demand and upstart competitors like Netflix. Blockbuster has taken aggressive steps recently to preserve its market share, launching an online mail order service to compete with Netflix and virtually abolishing late fees.

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