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Update: Blockbuster Gets Hostile

2 Feb, 2005 By: Erik Gruenwedel

Blockbuster Inc. has acted on its promised hostile bid for Hollywood Entertainment Corp.

The No. 1 video rental chain last week submitted paperwork to the Securities Exchange Commission (SEC) and the Federal Trade Commission (FTC) outlining a proposed $14.50 per share, or $1.3 billion, offer for all outstanding shares of Hollywood Entertainment Corp., parent of No. 2 Hollywood Video.

The offer includes $11.50 per share in cash and $3 per share in Blockbuster common stock.

“We believe this transaction will provide tremendous value to both Blockbuster and Hollywood shareholders, and should better position Blockbuster to compete in the rapidly changing home entertainment marketplace,” said John Antioco, Blockbuster chairman and CEO, in a statement.

Hollywood announced its special board committee was reviewing the offer and on or before Feb. 17 would weigh in on it. Hollywood requested in the statement that shareholders not make a determination whether to accept or reject the exchange offer until they have been advised as to Hollywood's position on the matter.

The Blockbuster offer, if accepted by Hollywood shareholders, would supplant No. 3 Movie Gallery's 13.25 per share, $1.2 billion cash offer approved last month by a special committee of Hollywood's board and expected to be completed, barring federal regulatory issues, as early as May.

In a statement, Gallery said its all-cash acquisition of Hollywood entails “greater closing certainty” and will deliver concrete value to Hollywood shareholders sooner than a Blockbuster acquisition.

The FTC is expected to render judgment on Blockbuster's bid by March 7.Although Blockbuster's bid includes less cash upfront, analysts said the $3-per-share stock addendum is superior to a stock swap, because it can be converted to cash for a minor transaction fee.

“It is essentially as good as cash,” said retail analyst Dennis McAlpine with McAlpine Associates in Scarsdale, N.Y.

With Gallery's proxy offer to Hollywood shareholders still under review by the FTC, which presents a formidable stumbling block for Blockbuster's bid as well, analysts believe Gallery will not counter the offer.

“Since Blockbuster's offer is contingent on passing FTC muster, why should Gallery make a counteroffer,” McAlpine said. “If Blockbuster doesn't get approval, why bid it up?”

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said Gallery's $27 million termination fee from Hollywood puts them in a no-lose situation.

“Why beat their heads against the wall,” Pachter said. “They are there at $13.25, if [Blockbuster's] deal falls through.”

Even so, Blockbuster has little to worry about with the FTC, Pachter said. Though the FTC will most likely find something to criticize in the Blockbuster bid, it will likely not be of the magnitude to kill the deal.

“Blockbuster essentially has national pricing,” Pachter said. “They undoubtedly have 100 percent market share somewhere in the country where there are no competing mom and pop video stores. Do they charge $6 per rental there? No. Because it isn't direct competition from other brick-and-mortar video stores that keep rentals at $4; it is competition from pay-per-view, video-on-demand, Netflix and sellthrough.

“The whole basis of antitrust is to keep the combined entity from exercising market power over the consumer and raising prices. If they don't have market power, then it is really kind of irrelevant.”

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