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Video chain accepts buyout

Movie Gallery Inc. claimed victory in the fierce video store bidding war for Hollywood Entertainment Corp. on Monday, thwarting for now the unwelcome advances by industry behemoth Blockbuster Inc.

The directors of Hollywood approved selling the company, based in Wilsonville, Ore., to the Alabama upstart for $850-million plus assumption of $350-million in debt. The combination would create a new No. 2 video chain with about 4,700 stores, about 1,000 fewer than Blockbuster operates in North America now. Worldwide, Blockbuster has more than 9,000 stores.

Stockholders will get $13.25 for each Hollywood share they own in a deal scheduled to close during the second quarter of 2005. Leonard Green & Partners, which had earlier agreed to finance taking Hollywood private for $10.25 a share, will get a $4-million fee to go away quietly. Blockbuster, which charges it was unfairly denied a chance to go over Hollywood's books, had said it would sweeten its December offer of $11.50 a share but appears to have been aced out by Movie Gallery.

"We would still love to acquire Hollywood, but we're not going to pay more than we think it's worth," said John Antioco, chairman and chief executive of Dallas-based Blockbuster. "We're frustrated at their process, but right now we are still assessing our options."

While Blockbuster could still up the stakes, analysts figure Antioco may have to bow out because the $13.25 a share offer is close to full price.

"Blockbuster has to decide how badly they want this franchise," Analytics Research analyst Scott Keller told Bloomberg News. "There remain antitrust questions about whether it would be the proper buyer for Hollywood."

As a result Blockbuster would have to offer a big premium.

Hollywood directors said they swung the deal to Movie Gallery because fewer duplicate stores would have to be closed and antitrust regulators were more likely to approve a combination of the nation's second and third largest video chains than the two biggest. The Federal Trade Commission in 1999 blocked a Blockbuster-Hollywood merger that would have put half the film-rental market in one company's hands.

But some experts figure regulators will ease their stance because the dynamics of the declining film rental industry have changed.

The video store is suffering from the growth of pay-per-view cable, subscription services such as Netflix and discount store pricing that has made ownership rival the cost of renting.

The video store chains, meanwhile, have been dramatically changing their business models to survive. They're getting into video game sales and exchanges while offering subscription pricing to frequent renters.

Founded in 1985 in Dothan, Ala., Movie Gallery went on an acquisition binge of small mom-and-pop video stores before going public in 1994.

Since then it has made more than 200 acquisitions of small chains concentrated in suburban and rural areas.

In 2003, annual revenues at its 2,200 stores were $692-million. That's about half the revenue of Hollywood and about one-ninth the $5.8-billion of Blockbuster.

Movie Gallery plans to keep Hollywood Video as a separate brand.

Blockbuster shares slipped after the news hit to close at $9.12, down 17 cents. Movie Gallery closed at $20.02, up 95 cents, and Hollywood Entertainment closed at $13.86, up 81 cents.

Analysts took the fact that Hollywood was trading above the purchase price as a sign some investors think Blockbuster will raise the ante.

Mark Albright can be reached at albrightsptimes.com or (727) 893-8252.

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