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Analysts: Hollywood Deal a Go

1 Nov, 2004 By: Erik Gruenwedel

Analysts say Hollywood Video shareholders will likely accept an Oct. 13 merger proposal, despite protests from a shareholder group.

Carso Holdings, a group of investors led by Hollywood founder and CEO Mark Wattles, and backed by financial restructuring firm Leonard Green & Partners, reinstated a previously stalled merger agreement to take the company private by offering to pay shareholders $10.25 per share, or about $619 million, among other modifications. That compared to a previous offer of $14 a share, or about $900 million.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said shareholders would accept the amended agreement largely because the share price is a good one in a shrinking rental market. Analyst Dennis McAlpine, of McAlpine Associates, in Scarsdale, N.Y., agreed. “The real question becomes is there something better out there,” he said. “They haven't found it yet.”

In a proxy statement sent to shareholders last week, Hollywood stated, among other provisions, that consummation of the merger is dependent upon approval by 50 percent plus one share of unaffiliated stockholders, excluding stock held by Wattles and members of the board.

Wattles, who would retain the CEO position and current $1.4 million annual salary, would be limited to no more than 12 percent of the company's common stock, the filing states. Bruce Giesbrecht and Timothy Price would remain as president/COO and CFO, respectively. Wattles would be given options to buy more than 30 million shares of preferred stock at $100 per share in addition to receiving a $2.5 million annual “monitoring fee” for 10 years. The filing also said Carso would receive up to $4 million in termination fees should the deal fail.

Last week, Dolphin Limited Partnership, which owns 1.9 million Hollywood shares, issued a letter to shareholders questioning, among other things, why the share offer price had fallen 27 percent despite Hollywood management's confidence in achieving earnings goals set in January. “Are the shareholders being toyed with again?” said the letter.

A Hollywood representative did not return calls by press time.

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