Looking to Set Stage for Video Chain Deal

A former Hollywood Entertainment Corp. chief executive is seeking to buy as much as half the movie rental chain’s stores, a move he said Tuesday could help win U.S. approval of a hostile takeover by rival Blockbuster Inc.

Mark Wattles, who owns 9.6% of Hollywood’s outstanding shares, resigned as CEO in February amid the bidding battle for the No. 2 U.S. video rental company. Hollywood has accepted an $850-million offer from smaller rival Movie Gallery Inc.

The Federal Trade Commission has cleared that deal and is preparing to go to court to stop Dallas-based Blockbuster’s $991.6-million hostile bid because of antitrust concerns, sources said.

Antitrust authorities at the FTC were scheduled to hold a meeting Tuesday, at which analysts expected the agency’s five commissioners to discuss the video rental merger.

There was no announcement from the FTC at the close of the agency’s business hours.

In a filing with the Securities and Exchange Commission, Wattles said he had sent a letter to Hollywood Entertainment’s board Monday saying the FTC would be more likely to approve a deal with Blockbuster if Hollywood sold him some stores.

Wilsonville, Ore.-based Hollywood Entertainment declined to comment.

Hollywood Entertainment previously has said Blockbuster’s offer raises “significant antitrust issues that cause substantial uncertainty as to whether the transaction is allowed to proceed.”

Wattles said he sent a copy of the letter to Blockbuster.

He said he had retained counsel and Challenger Capital Group as financial advisor for the potential transaction with Hollywood Entertainment. Wattles said he had held discussions with potential financing sources to fund a transaction.

Washington antitrust lawyer Mark Schechter said such a divestment plan would be “plausible,” but he said FTC officials would have to be convinced that divested assets would remain “competitively viable.”

“They have been very hard in the last several years,” said Schechter, a partner at Howrey Simon Arnold & White. “They have been very demanding.”

In the filing, Wattles said he intended to sell as much as half of his Hollywood Entertainment shares in the next few months.

Hollywood Entertainment shares fell 5 cents to $14.05, while Movie Gallery lost 82 cents $25.21, both on Nasdaq. Blockbuster rose 40 cents to $9.50 on the New York Stock Exchange.