Blockbuster drops bid to buy Hollywood

DSN Retailing Today, April 11, 2005 by Doug Desjardins

DALLAS -- Blockbuster Entertainment roared into March like a lion but went out like a lamb. The video retailer was dealt two blows last month when it dropped its bid to buy Hollywood Entertainment and agreed to pay $630,000 to pre-empt a lawsuit disputing its no-late-fees policy.

Blockbuster decided to end its pursuit of Hollywood after the Federal Trade Commission delayed a ruling on its proposal to buy the chain for $991 million. The FTC said Blockbuster provided "insufficient data" regarding its bid and the delay prompted Blockbuster to drop its offer to acquire the chain, noting that the FTC was likely to rule against the merger anyway because of anti-trust issues.

The decision also ended an effort by Hollywood founder Mark Wattles to acquire half of his former chain from Blockbuster. Wattles had proposed to buy the stores to help Blockbuster avoid antitrust issues.

With Blockbuster out of the picture, No. 3 retailer Movie Gallery has clear sailing to close its $850 million bid to buy the retailer, a deal shareholders are expected to approve this month. The purchase would give the 2,482-store chain based in Dothan, Ala., more than 2,000 Hollywood Video stores and 700 Game Crazy outlets, which buy and sell new and used games.

The merger would also give Movie Gallery a presence across the United States to complement its base of stores confined mainly to rural towns in the Midwest and South. During a conference call last month, Movie Gallery ceo Joe Malugen said the retailer would continue its long-held strategy of opening stores in rural areas. "We see no need to change our strategy now," said Malugen.

That small-town strategy helped Movie Gallery post $49.5 million in net income in 2004 on $791 million in revenue. Movie Gallery and Hollywood combined would create a 4,500-store chain with about $2.5 billion in annual revenue but would still be only about half the size of Blockbuster, which has 5,800 stores in the United States that, on average, do a higher volume of business than its two main competitors.

Analysts were mixed on how the acquisition will impact Movie Gallery. Michael Pachter, an analyst with Wedbush Morgan Securities, said it will be "a pretty large task just getting their arms around Hollywood," which is nearly twice the size of Movie Gallery in terms of annual revenue, but that he "thinks they'll succeed" in the long run. Pachter added that the combined chains will give Movie Gallery more leverage in its head-to-head battle with Blockbuster. Analyst George Whalin had a different outlook. "I think this could be their [Movie Gallery's] undoing," said Whalin, president of Retail Management Consultants. "The video rental business is declining and this isn't a good time to be adding locations."

Less than a week after Blockbuster dropped out of the bidding for Hollywood, the chain agreed to pay $630,000 to 47 states to avoid a lawsuit regarding its no-late-fees policy adopted in January. It will also give customers charged under the plan refunds or store credit.

The no-late-fees claim came under fire because it charges customers a $1.25 restocking fee on some late returns and the purchase price of the DVD on titles returned after 30 days. The chain has since produced new signs and brochures that explain the charges and how the late-fee policy works in more detail.