Blockbuster eyes Hollywood

DALLAS – Blockbuster Inc., the nation’s largest movie-rental chain, inched closer to a bidding war for Hollywood Entertainment Corp., saying it is still interested in buying its smaller rival despite Hollywood’s agreement to be purchased by another competitor, Movie Gallery Inc.

John Antioco, Blockbuster chairman and chief executive, said Tuesday that his Dallas-based company was evaluating making a new offer, although he gave no specifics.

Antioco said in a statement he was disappointed that a special committee of Hollywood Entertainment’s board accepted an $850 million offer from Movie Gallery "without giving Blockbuster a fair opportunity to participate in the auction process."

Hollywood Entertainment has refused to open its books to Blockbuster unless it agreed not to launch a hostile takeover for three years. Blockbuster, which said it needed to see the information to determine a fair price for its smaller rival, rejected the condition.

Movie Gallery, based in Dothan, Ala., the nation’s third-largest movie-rental chain, agreed last week to pay $13.25 per share in cash for No. 2 Hollywood Entertainment and assume about $350 million in debt. That trumped Blockbuster’s previous bid of $11.50 per share.

Antioco said it no longer made sense for Blockbuster to begin a previously threatened hostile takeover of Hollywood Entertainment at the $11.50 per share price, but he said Blockbuster was considering the price it would be willing to offer taking other factors into account, including a $27 million termination fee to Movie Gallery that is included in the deal with Hollywood Entertainment.

A combination of Hollywood Entertainment and Movie Gallery would create a chain with about 4,500 stores and annual revenue of about $2.5 billion, still far behind Blockbuster, which has about 9,000 stores worldwide.

All three top chains face growing competition from online rental operations, including Netflix Inc. and Wal-Mart Stores Inc. Analysts believe they will also face tougher competition in the future from internet and cable video-on-demand.

A spokesman for Hollywood Entertainment, Larry Dennedy, said there was "nothing to" Antioco’s latest comments. He said the company was not immediately worried about getting into a bidding war.

"That’s a hypothetical that we wouldn’t concern ourselves with," Dennedy said.

Thomas D. Johnson Jr., a Movie Gallery spokesman, declined further comment on the company’s $13.25 per share bid, which he called a great offer for shareholders, employees and customers. He said the company expects antitrust approval because of the small overlap of Movie Gallery and Hollywood stores.

Blockbuster said Tuesday that antitrust regulators had asked for more information about its offer to buy Hollywood Entertainment, but the company said it remained optimistic about winning regulators’ approval by the end of February.

Shares of Hollywood Entertainment, based in the Portland, Ore., suburb of Wilsonville, have moved above Movie Gallery’s offered price, indicating investors are betting on a bidding war.

Dennis McAlpine, an analyst with McAlpine Associates, said Antioco’s comments were designed to keep Hollywood’s stock price above the Movie Gallery bid so that investors won’t tender their shares to Movie Gallery. He said Blockbuster must detail a new offer by the time Movie Gallery files its proxy material, which the Movie Gallery spokesman said was probably a couple of weeks away.

Marla Backer, an analyst with Research Associates-Soleil, said Blockbuster’s lack of access to Hollywood’s books complicates a deal but shouldn’t kill it, given Blockbuster’s knowledge of the industry. She said Blockbuster could pay up to $16 a share and erode 2005 earnings by 5 cents per share but still gain in the long run by expanding its consumer base.