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UPDATE: Movie Gallery Makes Play for Hollywood

19 Nov, 2004 By: Kurt Indvik

Movie Gallery today announced it has submitted a formal proposal to acquire Hollywood Entertainment to Hollywood's board of directors. Movie Gallery did not disclose the amount or terms of the bid.

The bid comes on the heels of last week's announcement by Blockbuster of its interest in acquiring Hollywood for approximately $700 million, though that offer has not been publicly formalized.

“Our fully financed proposal would allow us to broaden our revenue base and strengthen our presence in the western United States,” said Joe Malugen, chairman and CEO of Dothan, Ala.,-based Movie Gallery, Inc.

“We have successfully acquired and integrated more than 200 companies since 1994 and believe this transaction represents another significant growth opportunity for Movie Gallery. We also believe our proposal represents almost no antitrust risk,” Malugen added. “Conversely, Blockbuster's proposed acquisition would create a dominant player with significant competitive overlap in the vast majority of markets served by Blockbuster and Hollywood Entertainment. We do not believe regulators will adopt the expanded view of the market that Blockbuster needs to complete a transaction."

Movie Gallery estimates the combined companies would represent the second-largest North American video rental company, with annual revenue exceeding $2.6 billion with more than 4,300 stores in the United States, Canada and Mexico.

"In addition, we believe Hollywood Entertainment is a well-positionedrentailer in its markets with attractive competitive dynamics and significantfuture growth opportunities," said Malugen. "The combined business would havea broader store presence creating a leading North American rentailer that cansuccessfully compete in urban, suburban and rural markets. We also believethat the combination of the two businesses is extremely compelling for ourcustomers, associates and shareholders as it will create one company withgreatly expanded points of distribution and significant opportunities forimproved scale and operating efficiencies."

Analyst Dennis McAlpine, managing director of McAlpine Associates, said Movie Gallery's addressing possible antitrust issues in a Blockbuster/Hollywood merger while implying a “superior alternative” to the $10.25 per share private offer from a group of investors led by Hollywood founder and CEO Mark Wattles and financial restructuring firm Leonard Green & Partners in October is a shrewd ploy designed to deflect attention away from the size of its offer and onto the merits instead.

“They basically told the [Department of Justice] not to buy the argument to the contrary [against antitrust],” McAlpine said. “The fact that someone has raised the issue means that they are going to have to take a closer look at it. That is a very neat maneuver.”

Merrill Lynch & Co. and Wachovia Securities are advising Movie Gallery inconnection with its proposal.

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