Hollywood Board Backing Lowest Offer

In Wall Street’s history of tangled deals, create a new chapter for Hollywood Entertainment Corp.’s effort to sell itself over the last year, a saga that has become increasingly complicated in recent weeks.

After months of talks that included a reduced offer, Hollywood’s unusually small five-person board is urging shareholders to back the lowest bid among those made public -- a going-private agreement worth $10.25 a share from Leonard Green Partners, a Los Angeles buyout shop.

The LGP bid has been approved by the board of the video rental chain, after it was vetted by the panel’s three-man special committee.

The boards of public firms typically have about 12 directors, give or take a few seats.

Adding to shareholders’ angst, management has an apparent vested interest in pushing through the LGP bid. Chairman and Chief Executive Mark Wattles would boost his more than 11% stake in the company to 50% under the LGP plan, though the agreement would call for him to transfer at least a 10% stake to senior management after the deal was completed.

“We have called into question the activities of the special committee and the insiders,” said Donald Netter, senior managing director at Dolphin Limited Partnership, owner of nearly 2 million Hollywood shares.

Hollywood did not return a message seeking comment.

Things may come to a head this week. Hollywood’s special committee has asked competing bidders to submit final offers by this evening, sources said. But with the company demanding bidders sign an onerous three-year agreement prohibiting an offer directly to Hollywood shareholders, it’s unlikely new bids will arrive.

Netter is demanding internal documents, including board- meeting minutes, and is asking why Hollywood was not subject to an open auction instead of the agreed buyout with terms that at least one interested party -- Blockbuster Inc. -- claims have deterred further bidding.

Because LGP slashed its offer from $14 a share in light of Hollywood’s softening sales, Blockbuster said last week that it would pay $11.50 and argued that its interest in a deal has been stymied by restrictions in Hollywood’s agreement with LGP.

Movie Gallery also has made an offer, although the specifics have not been divulged. Meanwhile, buyers in the open market believe Hollywood is worth more than the LGP offer, as the stock trades at nearly $13. Hollywood shares fell 11 cents Tuesday to $12.70 on Nasdaq.

A recent addition to the story is Wall Street warrior Carl Icahn, who purchased a big chunk of Hollywood shares last month, spending more than $60 million.

Netter said he had not spoken with Icahn, and Icahn has declined to comment. Blockbuster, LGP and Movie Gallery did not return calls seeking comment.