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Analysts: Rental Chain Hollywood Bidding War Is a Fight Over Shrinking Market Share

26 Nov, 2004 By: Erik Gruenwedel

Public rental chains are fighting over a bigger piece of a smaller pie this holiday season.

Movie Gallery’s ambitious bid for Hollywood Video — a week after Blockbuster’s publicized interest — would appear to complete a trio of contenders, including Hollywood founder and CEO Mark Wattles, and financial restructuring firm Leonard Green & Partners, that many might consider are chasing a rental market well past its prime.

Movie Gallery’s largely stock bid reportedly rivals Blockbuster’s in size. Blockbuster offered $11.50 per share, or a $700 million cash offer.

Dothan, Ala.-based Movie Gallery, together with Wilsonville, Ore.-based Hollywood Video, would create the second-largest North American video rental company, with annual revenue exceeding $2.6 billion, and more than 4,300 stores in the United States, Canada and Mexico.

The ongoing proliferation of DVD sellthrough and online rental subscription services lead some observers to believe that creation of a bigger retail rental footprint is akin to expanding warehouse space on the moon.

“With people renting online or downloading, owning a [video] store isn’t really a very appealing asset right now,” said Safa Rashtchy, analyst with Piper Jaffray in Menlo Park, Calif. “The only one who could make scale into what has turned out to be a commodity would be someone who can sell other things in the store.”

The list of possible suitors would appear small, with mass retailers such as Wal-Mart, Target and Costco long ago choosing sellthrough over rental.

“I’m sure there are plenty of retailers who would love to be that much bigger, but nobody who makes strategic sense,” said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles.

Along with financial buyer Leonard Green — whose $10.25- per-share private offer for Hollywood has been chastised by select shareholders and would now appear to be a footnote — Pachter doubted there are any strategic or media partners waiting in the wings.

“Media with Viacom [owning Blockbuster] obviously didn’t work very well, so I can’t imagine anybody else doing the same thing,” Pachter said. “No media company is going to buy retail.”

He said Movie Gallery’s bid is nothing more than an attempt at self-preservation.

“If Blockbuster and Hollywood merge, the next place to go is Movie Gallery’s turf,” Pachter said.

That said, retail analyst Dennis McAlpine, managing director of McAlpine Associates in Scarsdale, N.Y., described Movie Gallery’s addressing possible antitrust issues in a Blockbuster/Hollywood merger as a shrewd ploy to deflect attention away from the size of its offer and onto the merits instead.

“They basically told the [Department of Justice] not to buy the argument to the contrary [against antitrust],” McAlpine said. “The fact that someone has raised the issue means that they are going to have to take a closer look at it. That is a very neat maneuver.”

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