Hollywood Entertainment CEO Quits Amid Hostile Bid

The battle for Hollywood Entertainment Corp. took an unexpected turn Thursday when founder and Chief Executive Mark Wattles resigned, one day after rival Blockbuster Inc. said it would launch a hostile takeover bid for the nation’s second-largest video rental chain.

Hollywood Entertainment offered no details and elevated President F. Bruce Giesbrecht to succeed Wattles.

As for Blockbuster’s bid, Wilsonville, Ore.-based Hollywood Entertainment said its board of directors would make a recommendation to stockholders by Feb. 17.

Wattles had spurned overtures from Blockbuster, the nation’s largest video rental chain, instead agreeing last month to an acquisition by the industry’s third-largest company, Movie Gallery Inc.

Marla S. Backer, an analyst at Research Associates, said Wattles’ resignation should bode well for Blockbuster, which she predicted would prevail. The wild card, she said, will be Movie Gallery’s response.

The accord between Movie Gallery and Hollywood Entertainment entitles Movie Gallery to a $27-million breakup fee if another suitor prevails.

Blockbuster values its latest bid at $1.3 billion -- $11.50 in cash and $3 in stock for each Hollywood Entertainment share, plus $350 million in debt. Movie Gallery agreed to pay $13.25 a share.

Blockbuster declined to comment Thursday.

In a statement, Movie Gallery, based in Dothan, Ala., contended that its offer was better for shareholders, employees and customers, expressing confidence it would close the deal.

Movie Gallery said Thursday that Blockbuster’s bid posed antitrust problems because more than 80% of Hollywood Entertainment’s stores compete with Blockbuster stores. Its own stores, Movie Gallery said, barely overlap with Hollywood Entertainment’s.

Dallas-based Blockbuster has about 9,000 stores worldwide, including 5,500 in the U.S. Hollywood Entertainment and Movie Gallery together have about 4,500 stores.

If it bought Hollywood Entertainment, Blockbuster would control almost half the market in terms of video rental stores. Blockbuster contends that it would have only a 20% share of the market, which it defines to include mass merchants and Internet retailers.

In recent years, Blockbuster has seen its business threatened by retailers such as Wal-Mart Stores Inc. and Best Buy Co. that sell DVDs and by online video-rental operations such as Netflix Inc.

Blockbuster shares gained 37 cents to $9.77 on the New York Stock Exchange. On Nasdaq, Hollywood Entertainment rose 12 cents to $14.37, and Movie Gallery fell 45 cents to $20.80.