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Hollywood Deal To Go Private Is On Again — At Lower Price

14 Oct, 2004 By: Erik Gruenwedel


Hollywood Entertainment Corp. has reinstated a previously stalled merger agreement to take the company private — lowering the share price to do it.

The new deal will pay shareholders $10.25 per share, compared to the previous offer of $14 a share, among other modifications.

In March, Carso Holdings, a group of investors led by Hollywood founder and CEO Mark Wattles and backed by financial restructuring firm Leonard Green & Partners, pledged to pay shareholders $14 a share in a deal worth about $900 million.

That deal was met by a 24 percent drop in stock value, shareholder lawsuits — since settled — and discontent from two significant shareholder groups that questioned, among other issues, a $15 million personal loan to Wattles by the company in 2000, and instead proposed the company pay a dividend to stockholders vs. a buyout.

This latest announcement, which values the merger at more than $619 million, sent stock prices up more than 5 percent in midday trading.

Although details of the new deal remained scarce at press time, some provisions include elimination of a $21.2 million termination fee — previously payable to Carso should the merger fail; extension of the merger deadline to Feb. 28, 2005; and allowance for outside competing offers.

Also noteworthy, Wattles would contribute all of his equity holdings in Hollywood in exchange for an undisclosed amount of equity and retaining his current CEO position in the new company. He had previously pledged a “substantial” number of personal shares to the deal.

Hollywood announced it will outline conditions of the agreement in filings with the Securities Exchange Commission (not filed by press time) and a proxy statement to shareholders thereafter.

“The market was saying Hollywood was worth about $9 [per share] and this offer is about 10 percent more,” said Dennis McAlpine, an analyst at McAlpine Associates in New York. “I don't know what the alternative is. If the shareholders don't vote for it, is Mark's vote enough to constitute acceptance of the deal? If by selling his stock, does that give [Corso] control? This will all be made clear in the proxy statement.”

McAlpine said that regardless of the outcome, the deal is anything but a positive for the movie rental business.

“If indeed the concern by the investor is the industry as opposed to Hollywood specific, then it raises questions about the entire [business model],” he said.

Michael Pachter, analyst with Los Angeles-based Wedbush Morgan Securities, disagreed, saying alternatives to rental, such as digital download and video-on-demand, are not yet a threat.

“Your mom is not going to stop renting at a brick-and-mortar rental anytime soon,” Pachter said.

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