Blockbuster Plans Hostile Bid for Rival

Video-rental giant Blockbuster Inc. said Wednesday that it planned to launch a $1.3-billion hostile bid for its chief rival, Hollywood Entertainment Corp., hoping to scuttle a deal that Hollywood Entertainment forged with the No. 3 chain, Movie Gallery Inc.

The offer of $11.50 in cash and $3 in stock for each share of Wilsonville, Ore.-based Hollywood Entertainment is $1.25 a share more than what Movie Gallery agreed to pay last month.

“The gloves are off,” said Michael Pachter, analyst with Morgan Wedbush Securities. “There is nothing friendly about this.”

Dallas-based Blockbuster also disclosed Wednesday that several state attorneys general were investigating its “no more late fees” advertising campaign.

California Atty. Gen. Bill Lockyer isn’t among them, a spokesman for Lockyer said.

The company, which made the disclosure in a filing with the Securities and Exchange Commission, didn’t provide any details about the investigations.

Critics have called the ads misleading because, in some cases, consumers can be docked the full price of a DVD or pay a “restocking fee” if they keep rentals too long.

On Wednesday, shares of Hollywood Entertainment increased 8 cents to $14.25. That’s 25 cents shy of the new Blockbuster offer.

Blockbuster’s stock rose 20 cents to $9.40.

Both companies trade on the New York Stock Exchange. Blockbuster’s hostile bid announcement was made after the stock market closed.

With the cash-and-stock offer, Blockbuster Chief Executive John Antioco made good on his threat to bypass the board of directors with a direct appeal to shareholders.

In a letter to shareholders, Antioco said that the offer would add “tremendous value” to both companies’ portfolios.

Blockbuster’s first offer for Hollywood Entertainment was $11.50 a share.

At the time, Blockbuster indicated that it might be willing to pay more if it could review the company’s books without signing a “standstill agreement” that would prevent it from making a hostile bid.

Blockbuster has expressed confidence that its proposal would pass muster with federal antitrust regulators even though, with 9,000 stores, it is already twice the size of Hollywood Entertainment and Movie Gallery combined.

Video rental chains are facing strong competition from retailers such as Wal-Mart Stores Inc. and Best Buy Co., which sell videos to consumers, as well as from online upstarts such as Netflix Inc.

Blockbuster and Hollywood Entertainment executives declined to comment. Executives of Movie Gallery, which is based in Dothan, Ala., couldn’t be reached.