Hollywood or Bust

It seems these days that everyone wants a piece of Hollywood; Hollywood Video that is. Since opening its first store in 1988, only three years after main competitor Blockbuster Inc. (NYSE: BBI), Hollywood has become the second largest video rental store chain in the U.S. Now Hollywoodis being sought after by both Blockbuster, Inc. and Movie Gallery, Inc. (NASDAQ: MOVI). Both companies have made offer, but while the Movie Gallery deal has been approved, Blockbuster is headed to court in an attempt to speed up approval for its offer.

Despite reports that Hollywood’s board rejected the Blockbuster bid to takeover the company, as of February 25, 2005 Hollywood has stated that it remains neutral toward the Blockbuster deal. Blockbuster submitted its proposal on February 4, 2005 offering $11.50 per share plus a $3 share in Blockbuster stock for a total of $14.50.

In compliance with the Hart-Rodino-Scott Anti-trust Improvement Act, parties intending to merge or make acquisitions must not only inform the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (Anti-trust division) of their plans for the transaction, but also provide information regarding the company’s current operations. The purpose of the act is to allow the overseeing government agencies a chance to catch significant acquisition transactions and have an opportunity to detect and assess any anticompetitive effects that may result form the transaction. For this purpose the Act provides a three tier structure to aid the agencies. First, it allows sufficient time for a meaningful analysis of the transaction. Second, it helps ensure that critical information about the proposed transaction is provided to the government. And third, the Act functions as a tool for investigation and discovery by allowing agencies to obtain additional information they feel is relevant to the transaction proposed.

The ultimate effect and stumbling block for Blockbuster is that the Act prohibits the completion of the acquisition until 30 days after it has complied with the FTC’s request for information. Until last Friday, officials from the FTC have been in constant communication with Blockbuster for the past two-months seeking additional information. However, in late February Blockbuster VP Judy Norris stated that Blockbuster believes it had “substantially complied” with FTC’s request for information. The FTC has not agreed and filed a court order seeking compliance on March 4, 2005. Today, the court will hear from both sides and determine if Blockbuster has complied under the Hart-Rodino-Scott Act or if they will be required to provide more information to the FTC regarding its proposed bid on Hollywood Video.

Analysts say that it is rare for an agency to seek a court order for compliance, but it is also rare that the agency needs to make a second request for information. Typically a request for additional information is indicative that the agency is seriously considering a challenge against the deal or will require additional tie to evaluate the effects of the proposed transaction.

Time is not on Blockbusters side. With their tender offer to expire March 11, 2005, Blockbuster needs the court to act quickly and in their favor. Pushing back the start of the 30 days when compliance is determined to have been met from February forth could jeopardize any potential for a deal with Hollywood. Adding to the time pressure is an impending shareholder meeting where it is likely a vote will be taken on a proposed merger between Hollywood and Movie Gallery. Movie Gallery already has a definitive agreement with Hollywood offering $13.25 a share that was signed in January and the proposed merger has already passed FTC scrutiny.

Even if the court determines that Blockbuster has complied with its obligation to the FTC, questions will still exist. The current issue does not address or begin to determine if a Blockbuster-Hollywood merger would violate anti-trust laws. Block busters unsolicited offer would merger the number 1 and number 2 video rental companies. With the two companies already dominating over half of the market, there is concern that a price check would not exists on the merged entity as most Hollywood stores are within 2 miles of Blockbuster stores. In 1999 a similar deal between Blockbuster and Hollywood was denied due to concerns about higher rental prices for consumers. Blockbuster contends that this is not an issue since the world of video rental has been rapidly and dramatically changing. Since 1999 consumer spending on rentals has dropped by 10% mostly due to lower priced DVDs and the increase of video rental competition by on-line entities such as net-flix, video on demand, and other technologies. Also currently plaguing Blockbuster is its late-fee removal ads. Although, the ads state “no more late fees”, the most common complaint of customers, concerns have been raised that the ads are fraudulent and deceptive; customers who keep videos longer than the seven day grace period are billed on their credit card for the price of the video. With concerns like these, antitrust risk and other liabilities still surround Blockbuster.

Nevertheless, it seems Movie Gallery has the better chance to make it to Hollywood and succeed than Blockbuster as anti-trust regulators often miss important shifts in rapidly changing markets such as video and entertainment.

Company information links to CNNMoney.com:

Hollywood Video: (Research)

Movie Gallery: (Research)

Blockbuster Inc: (Research)