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Icahn Ups Hollywood, Blockbuster Stake

14 Dec, 2004 By: Erik Gruenwedel

Billionaire investor Carl Icahn has increased his stake in Hollywood Video to 5.8 million shares, or 9.54 percent, according to papers filed today by Hollywood Entertainment Corp. with the Securities Exchange Commission.

The Hollywood shares were purchased from Dec. 9 to 14 for an average price of $12.89 — $1.39 per share more than outstanding offers to acquire Hollywood from Blockbuster and No. 3 video chain Movie Gallery.

Hollywood currently has a reinstated $10.25 per share merger agreement (down from $14 per share) to take the company private with Carso Holdings — a group of investors led by Hollywood founder and CEO Mark Wattles and backed by financial restructuring firm Leonard Green & Partners.

Icahn's additional 700,000 shares of Hollywood — which put his total stock purchase at $69 million — coupled with an undisclosed number of new Blockbuster shares, led the self-proclaimed largest holder of Blockbuster and Hollywood stock to lobby hard for a merger between the two.

In SEC filings, Icahn reiterated support for Blockbuster's attempt to obtain access to Hollywood's finances — a move Hollywood has denied citing a confidentiality agreement with Carso.

“…Because of the synergies that would be involved in a combination of Blockbuster and [Hollywood], Blockbuster would be in a position to offer the greatest amount of consideration to [Hollywood's] shareholders,” Icahn said.

“Leonard Green is toast,” said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles. “They will stay in the wings in case the Justice Department blocks a [Hollywood/Blockbuster] merger. Short of that, the Hollywood board of directors has no choice but to accept.”

Not so, countered Dennis McAlpine, retail analyst with McAlpine & Associates in Scarsdale, N.Y.

He said a Blockbuster/Hollywood merger would create a monopoly in the video rental business, leaving Movie Gallery at a very distant second.

“The interest in the industry would pretty much dry up because there would be no competition,” McAlpine said. “What you would like to see is Movie Gallery and Hollywood together, because that would put them at about the same competitive size as Blockbuster. That would make for a more competitive market and clear any hurdles from federal regulators.

“As much as Blockbuster has said all these wonderful things [about a merger with Hollywood], they are the same things I would say if I thought I had a problem [with federal regulators]. And I think they do,” he said.

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