Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Investors approved Blockbuster Inc.’s $1 billion bid for Hollywood Entertainment Corp., bumping up the stocks of both video renters Thursday. Regulatory approval, however, will likely turn not on the movie-rental market, which a combined company would dominate, but on the retail sector’s great diversification hope — the rental of video games. Blockbuster addressed antitrust concerns on confirming its interest to offer Hollywood Entertainment $11.50 a share in cash and to assume its debt load of $350 million, but it appeared to do so only with movie rentals in mind. “The rental industry faces significant competitive threats from nontraditional channels, largely attributable to retail DVD, which is widely available from a variety of retailers, including mass merchants, grocery stores, bookstores, convenience stores, as well as online services, among others,” Blockbuster stated. “Additionally, consumers have increasing movie-delivery alternatives from technology-enabled sources, including cable, satellite and computer downloading.” Wall Street found the rationale convincing, at least as far as it went. Hollywood Entertainment’s stock shot up 11.5 percent to end the session at $10.93 a share, while Blockbuster gained 11.0 percent to close at $8.19. The day’s gain left Hollywood Entertainment stock above the $10.25 per share that Los Angeles-based Leonard Green & Partners LP offered the video renter in last month’s restated merger agreement, but the price remains below the $14 per share the buyout firm initially offered Hollywood Entertainment in March. Leonard Green could not be reached for comment on Blockbuster’s offering a 12 percent premium over the offer in its revised agreement. Hollywood Entertainment had no immediate comment, either, although its restatement of merger terms not only allows it to entertain competing proposals but also eliminates a $26.5 million termination fee previously payable to Leonard Green. Blockbuster, which recently freed itself from Viacom Inc. control, said the merger would be immediately accretive to cash flow and to earnings per share. That makes sense, considering Hollywood Entertainment reported $414.5 million in cash flow on sales of $1.75 billion for its trailing 12 months. A merger between Blockbuster and Hollywood Entertainment would combine the two leading video renters and leave the resulting entity with almost half the industry’s sales. Still, it’s a shrinking industry, as evidenced by a 3.5 percent slide in rental-product revenues for Hollywood Entertainment in the most recent quarter, as well as by a 3.0 percent decline in same-store sales by Blockbuster over the same period. The declines would have been worse were it not for the outlets’ game rentals. Blockbuster said in its third-quarter report with the Securities and Exchange Commission that it had $110 million in game-rental revenue for period — up 5 percent from the year-earlier period; in its latest 10Q, Hollywood Entertainment reported that $27 million in quarterly game rentals now account for 8.5 percent of total rental sales. In addition, Blockbuster said that it was already operating 400 game-rental stores inside of its locations and that it planned to expand that number in the fourth quarter. It also bought Rhino Video Games in May, gaining 50 free-standing game-rental stores. Antitrust experts said they expected the FTC will issue a second request for more information about the proposal simply because of its potential participants’ size. Blockbuster has 5,700 outlets in all 50 states, while Hollywood Entertainment has 1,973 stores in 47 states and the District of Columbia. “If there are neighborhoods where Blockbuster and Hollywood were the only rental companies, that would likely be investigated and the FTC staff would want to know how other alternatives affect consumers,” said Michael Cowie, a partner at Howrey, Simon, Arnold & White in Washington and a former head of the FTC’s merger litigation task force. Even if the renters did dominate a neighborhood, antitrust experts said the FTC might consider pay-per-view offerings from cable and direct broadcast satellite services sufficient competition. NetFlix Inc. and other mail-order DVD rental companies also compete for the business, and NetFlix has reported that Amazon.com Inc., the on-line giant, plans to enter the movie-rental market as well. Cowie said Wal-Mart Stores Inc. and other retailers might also be part of the market because they aggressively price their DVDs. That makes purchasing the movie a viable alternative to renting. The game-rental market, by contrast, is not as sophisticated. The Web site www.video-game-rental-easy-comparison.com identifies nine online game renters. None are household names. NetFlix has not moved into the game-rental market and neither has Amazon. Despite the more limited alternatives for game rentals, antitrust experts said they would be surprised if the FTC tried to block the merger. There are few barriers to entry into the game-rental market and little to stop other established retailers — brick-and-mortar as well as on-line — from entering if Blockbuster were to raise prices. Yet antitrust experts said there is likely to be enough concern that the FTC will conduct an extensive investigation that could take months to conclude. Copyright �2004 TDD, LLC. All rights reserved.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.