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Movie Gallery Gets $27M If Hollywood Bid Trumped

12 Jan, 2005 By: Erik Gruenwedel

No. 3 video rental company Movie Gallery would receive a $27 million fee should its $850 million acquisition bid of No. 2 Hollywood Video be surpassed by a superior offer, according to regulatory filings from both companies.

Movie Gallery Monday announced a $1.2 billion acquisition offer for Hollywood that would create the second-largest rentailer with more than 4,400 stores, 700 Game Crazy video game outlets and an annual revenue of approximately $2.5 billion.

The termination fee — part of confidentiality agreement signed by Gallery that included, among other provisions, a covenant prohibiting Gallery from initiating a hostile takeover bid for Hollywood — is typically designed to compensate a bidding company for time spent consummating a deal while at the same time thwarting rival offers.

“You want to have a break-up fee because Movie Gallery is spending all its time and resources, and they want to make sure if five months later they find out it is not going to happen, at least they have been compensated,” said Arvind Bhatia, analyst with Southwest Securities in Dallas.

Blockbuster, which had refused to sign a confidentiality agreement and had been lobbying Hollywood shareholders with an $11.50 per share cash offer, specifically urged Hollywood not to enter into a break-up fee or deal protections with competing suitors, saying it would deduct such fees from its offer.

Although designed as a deterrent, the $27 million termination fee equates to about 50 cents per Hollywood share — an amount not likely to curtail Blockbuster's interest.

“I think Blockbuster [will make] another bid,” said Marla Backer, media analyst with Research Associates — Soleil Securities in New York. “ I don't anyone, including Movie Gallery, thinks this is a done deal.”

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