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Movie Gallery to Acquire Hollywood Video

10 Jan, 2005 By: Holly J. Wagner

Movie Gallery will acquire Hollywood Video in a deal valued at $1.2 billion --- $13.25 a share plus assumption of $350 million in debt – an offer that bests competing bids from a private investment group and Blockbuster Video.

The deal, expected to be finalized during the second quarter, will yield a new second-largest rentailer, snowballing Movie Gallery's 2,475 stores with Hollywood's 2,000 video stores and 700 Game Crazy stores. It will give Movie Gallery an immediate presence in the West, where the chain has few stores. The combined company will be the second largest North American video rental company with annual revenue of approximately $2.5 billion.

"This transformational merger creates a leading North American rentailer with outstanding prospects for future growth. With a broader geographic presence and greatly improved distribution capabilities and scale, our combined company will be a strong competitor, well-positioned for continued success in urban, suburban and rural markets,” said Movie Gallery chairman, president and CEO Joe Malugen. "We are proud of our successful track record of integrating acquisitions, including more than 200 companies purchased over the last ten years. We believe this combination with Hollywood presents an outstanding opportunity to enhance value for shareholders, create new career opportunities for employees and associates of both companies and expand our presence to better serve customers and the communities in which we operate."

Hollywood shares were up almost five percent, to $13.67, and Movie Gallery shares rose nearly percent, gaining $1.93 to hit $21, in midday trading. Blockbuster shares lost 26 cents, or nearly 3 percent.

Providing the deal goes through, Malugen will serve as chairman, president and CEO of the new company, which will retain both headquarters in Dothan, Ala., and Wilsonville, Ore. Hollywood will become a subsidiary of Movie Gallery and will continue to operate under the Hollywood brand name.

But Blockbuster CEO John Antioco said later at an analyst presentation that the No. 1 chain is still interested in acquiring Hollywood and that Blockbuster executives have been discussing the possibility with the Securities and Exchange Commission (SEC) since before Thanksgiving. The company said in a late December press release that it would pursue a hostile bid for $11.50 per share in the middle of this month if Hollywood management did not cooperate with its requests for information, leaving open the possibility that it could go directly to shareholders with a better offer.

“We would still love to acquire Hollywood video. That would be No. 1 on our radar screen. At the same time we have been frustrated by the process that they ran,” Antioco said. “Last week we sent a letter to the special committee telling them we wanted to move forward, that we wanted information and would be willing to increase the offer price. Obviously with their announcement this morning, they decided they wanted to go a different direction. We are still interested in it, but we will not pay more than it is worth.”

The Movie Gallery deal was a result of an auction process led by a special committee of Hollywood's board of directors after an earlier plan to take the company private fell through Oct. 13. That deal with Carso Holdings Corp., an affiliate of Leonard Green & Partners, L.P., let Hollywood solicit better offers. Under the terms of that proposal, Hollywood's shareholders were to receive $10.25 per share in cash. The $13.25 per share price to be received by Hollywood's shareholders under the terms of the merger agreement with Movie Gallery represents a 30 percent premium over the $10.25 price negotiated with Carso.

Hollywood terminated its agreement with Carso and entered into the deal with Movie Gallery following a unanimous recommendation by the special committee. Hollywood will have to pay Carso's transaction expenses up to a maximum of $4 million, but not a termination fee.

UBS Investment Bank acted as financial advisor to the Hollywood special committee in the proposed transaction and the special committee and the board of directors received a fairness opinion from Lazard on the Movie Gallery transaction. Gibson, Dunn & Crutcher LLP provided legal advice to the Special Committee and Stoel Rives LLP provided legal advice to Hollywood in connection with these matters.

Shareholders still have to approve the deal and some analysts speculated that Blockbuster could yet increase its bid for Hollywood. Blockbuster threatened to mount a hostile takeover by mid-month if Hollywood executives did not open that company's books for inspection for a possible Blockbuster acquisition.

Merrill Lynch & Co. and Wachovia Securities, Inc. acted as financial advisors, and Alston & Bird LLP and Troy & Gould PC acted as legal counsel to Movie Gallery.

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