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Gallery to Cut Few Hollywood Positions

29 Apr, 2005 By: Erik Gruenwedel

Don't expect Movie Gallery to significantly cut Hollywood Entertainment Corp.'s payroll or shutter stores in the short term, say analysts familiar with the recently merged video rental companies.

Hollywood shareholders April 22 formally approved Dothan. Ala.-based Gallery's $13.25-per-share, or $1.2 billion, cash offer. Last week, Gallery completed the deal.

Among principal selling points to Movie Gallery's bid was its desire to maintain the Hollywood brand and “distinct operational model” as a wholly owned subsidiary based in its Wilsonville, Ore., headquarters. With largely rural locations, Movie Gallery was also seen as less intrusive to Hollywood's more urban store locations — a federal antitrust hurdle many believe helped sink rival Blockbuster Inc.'s bid.

“Gallery mostly competes with Blockbuster, so they aren't necessarily in areas [that] Hollywood is,” said Todd Zaganiacz, president of the National Entertainment Buying Group of video rentailers. “I'm sure there will be some pockets that this occurs, but for the most part they will be acquiring new territory.”

As of Feb. 28, 2005, Movie Gallery employed 23,500 (19,800 part-time) retail, support, field and distribution “associates.” Hollywood employed 30,616 people, of which 29,601 worked in stores and zone offices.

While it is likely Hollywood CEO Bruce Giesbrecht and other executives retained would become senior executives under the Gallery corporate umbrella, analysts expect to see initial management cuts in overlapping departments, including accounting, product acquisitions and real estate development.

“I think the downsizing will initially be more on the corporate level and that will happen very slowly because I believe Gallery has made some commitments to Hollywood not to close some back office operations,” said Marla Backer, media analyst with New York-based Research Associates/Soleil Securities.

Retail analyst Dennis McAlpine with McAlpine Associates, in Scarsdale, N.Y., concurred, saying management bloodletting would be less than what would be normal in such a situation “where you just fire everybody that is out there.&quo;&quo;I wouldn't buy a new house if I was a Hollywood corporate type,” McAlpine said.

Tale of Real Estate
Hollywood had 2,006 stores (excluding 715 Game Crazy in-store video game outlets) at the end of 2004, including 96 new locations, four acquisitions and 14 closures. Gallery had 2,511 locations in North America and Mexico, which included 350 new stores, five acquisitions and 12 closures.

Perhaps indicative of the companies' store synergy, Hollywood has 334 locations (150 Game Crazy outlets) in California to Gallery's 18. Ditto for Gallery's home state Alabama, where it has 185 stores to Hollywood's 13 (1 Game Crazy). Gallery has four stores in Hollywood's home state of Oregon.

States with the most potential for store overlap include Texas (198 to 136 in favor of Hollywood); Pennsylvania (86/76, Gallery); Ohio (130/84, Gallery); Florida (142/88, Gallery); Michigan (64/57, Hollywood); and Minnesota (55/40, Gallery).

“There are some markets in which they do overlap, and I would think they will look at those markets on a market-by-market basis,” said Backer.

A Gallery spokesperson was not immediately available for comment.

In related news, Hollywood formally ceased as a separate entity with the Securities and Exchange Commission, and Gallery announced pricing for its institutional placement of $325 million in 11 percent senior notes, or bonds, due 2012.

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