Smaller rival bids to buy Hollywood Entertainment

PORTLAND, Ore. -- Video rental giant Hollywood Entertainment Corp. has agreed to a buyout offer of nearly $850 million from smaller rival Movie Gallery Inc. in a deal that would create a stronger challenger to the industry leader, Blockbuster Inc.

But in a sign that Wall Street is betting the fight for Hollywood Entertainment may not be over, investors pushed its shares well above the offered price.

The planned combination disclosed yesterday of the number two and number three video rental chains would create a company with annual revenue of approximately $2.5 billion and approximately 4,500 stores. Blockbuster has 9,000 outlets worldwide.

The agreement comes as traditional video rental companies are locked in a price war with online pioneer Netflix Inc. and Wal-Mart Stores Inc.

Hollywood Entertainment, based in Wilsonville, Ore., has been looking for a buyer for several months and had attracted bids from both Movie Gallery and Blockbuster.

Late last month, Blockbuster said it would launch a hostile bid for Hollywood Entertainment in January if the rival's directors failed to negotiate a deal. Blockbuster had offered $11.50 a share for Hollywood. Blockbuster spokesman Randy Hargrove yesterday declined to comment on the Movie Gallery deal.

Under the deal, Movie Gallery would offer $13.25 a share, or about $850 million, in cash for Hollywood Entertainment's shares. It would also assume about $350 million in Hollywood's debt.