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UPDATE: Hollywood Privatization In Doubt

6 Aug, 2004 By: Erik Gruenwedel

Hollywood Entertainment Corp. announced today that its planned public-to-private transaction with a group of private investors is in jeopardy due to what it called “industry and market conditions.”

The company said it is exploring alternate options.

Last March, Carso Holdings, a group of investors led by Hollywood founder and CEO Mark Wattles and backed by financial restructuring firm Leonard Green & Partners, pledged to pay shareholders $14 a share in a deal worth more than $900 million.

News of the failed merger dropped Hollywood stock 24 percent in mid-day trading.

Officials from Hollywood and Leonard Green & Partners were not immediately available for comment.

Analyst Dennis McAlpine, of McAlpine & Associates, said the obstacles appear to be more significant to Hollywood and not necessarily a reflection on the video industry.

“It sounds like there was a material adverse change, which is basically a term of art that says they didn't meet the conditions of the merger,” McAlpine said. “Presumably when they entered into these terms, there were various conditions that had to be met, such as maximum debt levels, minimum cash flow, open X number of new stores, certain contracts signed, etc.”

McAlpine agreed that if Hollywood screwed up and didn't meet conditions set forth in the merger, it could get hit with shareholder lawsuits.

“But remember, they were getting hit with lawsuits that the price was too low,” he said. “Now, obviously $14 [per share] looks pretty high.

“Clearly, they have to get to some definitive term of what's going on. If this is a negotiating ploy by Green to get a lower price, Hollywood has to deal with that. If not, Hollywood has to break the deal and go its separate way.”

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