Hollywood Entertainment Accepts Movie Gallery Offer

The drama starring the nation’s three largest video chains took a turn Monday when Movie Gallery Inc. said it had reached a deal to acquire the No. 2 chain, Hollywood Entertainment Corp., for $850 million.

That probably set the stage for a bidding war because another Hollywood Entertainment suitor, industry giant Blockbuster Inc., isn’t expected to back off.

“I don’t think Blockbuster is going to go quietly into the night on this one,” said Larry Gerbrandt, media and entertainment analyst at AlixPartners. “There are no equivalent prizes out there to go after.”

The deal that Hollywood Entertainment made with Movie Gallery is for $13.25 a share. Investors anticipated that it might persuade Blockbuster to sweeten its $11.50-a-share bid: They pushed Hollywood Entertainment’s stock up 81 cents to $13.86 on Nasdaq.

Speaking at an investment conference Monday, Blockbuster Chief Executive John Antioco said the Dallas-based chain was still keen on buying Hollywood Entertainment and was assessing the situation. Blockbuster has said in the past that it may go so far as to take its offer directly to the Wilsonville, Ore.-based company’s shareholders.

Although it has more financial clout than Movie Gallery, Blockbuster potentially faces more hurdles from antitrust regulators because it is already a dominant player in the market. Movie Gallery, based in Dothan, Ala., is the third-largest video rental store chain.

Hollywood Entertainment said that was a reason it had accepted the Movie Gallery offer, which includes assuming $350 million of debt.

The deal has “substantially less regulatory risk than any deal with Blockbuster,” said Daniel Burch, a spokesman for Hollywood Entertainment.

Together, Hollywood Entertainment and Movie Gallery would have annual revenue of $2.5 billion and about 4,500 stores in the United States, Canada and Mexico.

The combined company would be about half the size of Blockbuster, which has nearly 9,000 stores. But Movie Gallery CEO Joe Malugen said it would create a company with “a broader geographic presence and greatly improved distribution capabilities and scale.”

Another bid on the table is for $10.25 a share, by an affiliate of Los Angeles private equity firm Leonard Green & Partners.

Blockbuster is eager to swallow its chief rival because it faces heavy competition from retailers such as Wal-Mart Stores Inc. and Best Buy Inc., which are major sellers of discounted DVDs, cable television companies that show pay-per-view films, as well as online services such as Netflix Inc.

Whether Blockbuster will prevail isn’t clear. If it offered more money, it may also have to pay a so-called breakup fee to Movie Gallery, said Marla Backer, a media analyst at Research Associates-Soleil Securities.

Still, Backer said Blockbuster probably would “come back with an offer directly to Hollywood’s shareholders.”

At the media investment conference, Antioco cautioned that although the company would like to buy Hollywood Entertainment, it wouldn’t overspend.

“We are not going to pay more than we believe the company is worth,” he said.

Blockbuster’s stock dropped 17 cents to $9.12 on the New York Stock Exchange, and Movie Gallery rose 95 cents to $20.02 on Nasdaq.