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Blockbuster sets in motion hostile bid for Hollywood Video
Posted on Sat, Feb. 12, 2005
PORTLAND, Ore. - Dallas-based Blockbuster Inc. has begun a hostile takeover of its smaller Oregon rival, Hollywood Entertainment Corp.
Blockbuster officials said Friday the company had approached Hollywood's creditors to buy around $225 million of the video retailer's debt, roughly two-thirds of the Oregon company's overall debt.
The offer sets in motion Blockbuster's plan announced one week ago to offer $985 million in cash and stock for No. 2 Hollywood, which has already agreed to a $900 million offer from the nation's third largest video chain, Alabama-based Movie Gallery Inc.
Blockbuster's bid equals $14.50 cash and stock per share, compared to Movie Gallery's offer of $13.25 cash only per share.
Both suitors had promised to assume the $350 million in Hollywood debt.
"When you buy a company, you also assume all its debt and liabilities - Blockbuster is saying 'We're ready to start buying your debt,'" said analyst Arvind Bhatia, senior vice president and director of research at Southwest Securities Inc. in Dallas. "It's just step No. 2 in what Blockbuster already announced they would do," he said.
Shareholders have until March 11 to decide whether or not to sell their shares to Blockbuster, the nation's largest video retailer with roughly 9,000 stores worldwide.
If Hollywood and Movie Gallery were to merge, it would create a combined video chain with about 4,500 stores - still only half the size of the far larger Blockbuster.
And smaller is sometimes better, Movie Gallery officials argue. In their pitch to Hollywood shareholders, they have consistently stressed that the Blockbuster bid will most likely be struck down by regulators. In 1999, the Federal Trade Commission derailed Blockbuster's plan to swallow Hollywood, after the deal was deemed anticompetitive.
Blockbuster officials counter that the market is no longer just video retailers, but also big box chains which sell videos and DVDs, such as Wal-Mart, and mail-order retailers like Netflix. If the market is expanded to include those players, the combined No. 1 and No. 2 video rental chains is no longer a regulatory threat, officials of the nation's leading chain said.
"We're dealing in a commercial world where the reality is Wal-Mart and the new technologies are the competitor and the competition is national in scope. Local video rental is irrelevant in that scheme," said Blockbuster spokesman Randy Hargrove. "The sensible thing for the Federal Trade Commission to do is to make a decision consistent with the realities we are experiencing - and allow shareholders of Hollywood to choose between the offers on their merits, without regulatory delay or interference," he said.
Analysts say that that argument is one which might fly in a Republican administration, but they caution that the regulatory hurdle cannot be ignored.
"You could say the chances of approval are higher than under a Democratic administration, but that's not to say its a slamdunk," said Bhatia, referring to the marriage of Blockbuster and Hollywood.
Daniel Burch, a Hollywood spokesman, declined to comment, saying the company intends to respond by Feb. 17, or 10 business days after Blockbuster's initial offer as required by federal securities law. Officials at Movie Gallery did not immediately return calls.
For shareholders, there are now three possible avenues of action, industry watchers say.
They could sell their shares right now at $14.27 per share - the least risky bet.
Or they could gamble on Blockbuster's $14.50 per share offer and pray regulators approve the merger. Third, they could hold out and hope that Movie Gallery ups-the-ante by increasing its $13.25 all cash bid, one which will most likely will sail through regulatory hoops.
"It's a question of a bird in hand versus one in the bush," said analyst Marla Backer with New York-based Research Associates-Soleil.
Blockbuster shares fell 5 cent to $9.40 in Friday trading on the New York Stock Exchange, while Hollywood Entertainment shares rose 20 cents to $14.27 on the Nasdaq. Movie Gallery inched up another 9 cents to $21.42 also on the Nasdaq.
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