Chief Rival Makes Bid for Video Chain

A bidding war could be breaking out for Hollywood Entertainment Corp.

Blockbuster Inc., the biggest player in movie rentals, confirmed Thursday that it had made a $700-million offer for its chief rival.

Blockbuster’s bid for the owner of the Hollywood Video chain bested an offer from Los Angeles-based buyout firm Leonard Green & Partners. It struck a deal with Hollywood Entertainment last month to join with the company’s founder, Mark J. Wattles, to take it private.

That agreement, however, allowed Wilsonville, Ore.-based Hollywood Entertainment to solicit other offers. A person familiar with the situation said that in recent weeks, a committee composed of representatives of Hollywood Entertainment investors had approached Dallas-based Blockbuster. Its tender came in at $11.50 a share -- $1.25 more a share than Wattles and Leonard Green would pay.

Blockbuster would also assume about $350 million in Hollywood Entertainment debt.

On Thursday, Blockbuster shares rose 82 cents, or 11.1%, to $8.20 on the New York Stock Exchange, and Hollywood Entertainment shares rose $1.13, or 11.5%, to $10.93 on Nasdaq.

Wattles said that he and the buyout firm weren’t “exactly backing off.”

“I’d like very much to buy the company,” he said, adding that he anticipated there would be additional bids in coming days. “If somebody can ultimately pay more than what Leonard Green and myself are willing to pay, then I won’t own the company.”

Acquiring Hollywood Entertainment would give Blockbuster, which has 8,900 stores around the globe, more than 1,900 additional stores. It would also add 600 Game Crazy stores to Blockbuster’s portfolio, giving the company a new platform in the growing area of video game rentals and sales.

Blockbuster executives have said they want to expand beyond the movie-rental business, making stores in the chain one-stop shops for home entertainment, with particular emphasis on games.

“What we are seeing is the logical step for Blockbuster in terms of trying to stay competitive and keep their rental business from sliding further,” said Larry Gerbrandt, head of the media and entertainment practice at AlixPartners.

But Marla S. Backer, an analyst with Research Associates, questioned the wisdom of Blockbuster “getting even further entrenched in the brick and mortar business, which is under a lot of pressure right now. I don’t know if spending a billion dollars on this business is a good use of their cash.”

With the emergence of online DVD mail-order services such as Netflix Inc., and with retailers like Wal-Mart Stores Inc. selling discounted videos and cable and satellite providers offering easy access to movies, consumers are no longer so dependent on video-rental chains.

In 1999, the Federal Trade Commission, citing antitrust concerns, nixed a plan by the two companies to merge and rename all Hollywood Video stores under the Blockbuster banner. But the video-rental business has changed drastically in five years.

Stacey Widlitz, an analyst for Fulcrum Global Partners, said regulators would probably block the purchase if they considered the movie-rental business as a single industry but not if they grouped rentals with retail sales of DVDs and games. Widlitz said the combined company would control about half the U.S. rental business but only about 20% of rentals and retail sales.

Leonard Green and Wattles first agreed to buy the video chain in March for $14 a share, but last month, a committee of Hollywood Entertainment’s independent directors announced changes in terms of the original deal: The price fell to $10.25 a share, and Hollywood Entertainment was freed to solicit competing proposals.

Hollywood Entertainment earned $59 million on sales of $1.28 billion in the first nine months of this year.

Blockbuster, which last month completed its separation from media conglomerate Viacom Inc., lost $1.26 billion on sales of $4.33 billion in the first nine months.

Associated Press was used in compiling this report.

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How industry giants compare

Blockbuster Inc.

Founded: 1985

Headquarters: Dallas

Business: Rental and sales of DVDs, videos and video games

Service area: United States & territories plus 25 foreign countries

Number of stores: 8,900

Employees: 85,200

2003 revenue: $5.9 billion

2003 net income: $983.9 million

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Hollywood Entertainment Corp.

Founded: 1988

Headquarters: Wilsonville, Ore.

Business: Rentals and sales of DVDs, videos and video games at Hollywood Video stores

Service area: 47 states in the U.S.

Number of stores: About 1,900

Employees: 27,900

2003 revenue: $1.7 billion

2003 net income: $82.2 million

Sources: Company reports, Times research

Los Angeles Times