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Merger Mania: Movie Gallery Stock Soars, Blockbuster's Drops

28 Mar, 2005 By: Erik Gruenwedel

Wall Street today rewarded Movie Gallery for apparently emerging victorious over No. 1 video rental company Blockbuster Video with its $13.25-per-share bid for No. 2 Hollywood Video.

Blockbuster last week announced it would not extend its $14.25-per-share hostile bid for Hollywood, citing ongoing concerns about the deal with the Federal Trade Commission, among other issues.

Shares of Dothan, Ala.-based Gallery shot up more than 22 percent ($5.39) in afternoon trading, to $29.45 per share. By comparison, shares of Blockbuster fell less than 6 percent (54 cents) to $8.92; Hollywood shares dropped more than 6.5 percent (93 cents) to $13.20 per share.

Trading volume for Blockbuster, Gallery and Hollywood shares was heavy, with more than 7.9 million Gallery shares trading hands, compared to an average volume of 437,363 shares. More than 4.7 million shares of Hollywood common stock traded Monday (average 1.26 million); 7.6 million Blockbuster shares (2.08 million average) traded.

Retail analysts say the pending merger will produce two big players in a market previously dominated by one. Blockbuster will now have a more sizable competitor, but Gallery will also have the challenge of incorporating a management style suited to running bigger Hollywood stores.

Independent retail analyst Dennis McAlpine, with McAlpine Associates in Scarsdale, N.Y., said the average Movie Gallery store generates about $350,000 in annual rentals, and the average Hollywood store about $750,000. Blockbuster stores average about $1 million in annual rental revenue.

“You have to worry more about inventory control, manage turnover, rev-share [of new product] opposed to buying, product placement and figuring out what you want to do with that space,” McAlpine said. “Do you want to rent games, sell games or sell videos? — all the things Blockbuster is dealing with.”

McAlpine said there will probably be layoffs at the management level, citing the lack of having multiple regional managers and duplicate film buyers.

Thus far, Gallery has stated it would operate Hollywood as a separate unit — without the likelihood of including adult fare as is done in select Gallery locations, according to analyst Michael Pachter with Wedbush Morgan Securities in Los Angeles.

Pachter agrees Gallery will have to change its management style, although he isn't sure how. He said the pending merger is analogous to the scenario of Target acquiring Wal-Mart, or Circuit City taking over Best Buy.

“Are those businesses really different?” Pachter said.

He said the challenge for Gallery would be in sustaining growth levels investors have come to expect from a company that annually opens a couple hundred stores and increases revenue by $100 million.

“Now, opening up a couple hundred stores and driving revenue up $100 million isn't enough, because their revenue base is so huge,” Pachter said. “I think Movie Gallery [management] will succeed; [the company] is probably going to make a ton of money. But [these are] still the right questions to ask.”

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