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Does Blockbuster Inc.’s offer for Hollywood Entertainment Corp. violate antitrust law, as the target of the hostile bid contends? We may never know. That’s because, for antitrust enforcers, assessing whether the deal weakens video industry competition may be subordinate to weighing the potential damage of losing another high-profile merger challenge. Hollywood Entertainment has highlighted the antitrust concerns around Blockbuster’s offer in rejecting the $991 million cash-and-stock bid. The company, which favors an $852 million all-cash offer from Dothan, Ala.-based Movie Gallery Inc., recently said that “the uncertainties and possible delays inherent in Blockbuster’s offer outweigh” the higher price tag. The Federal Trade Commission must decide by mid-March whether it will oppose Blockbuster’s bid for its Wilsonville, Ore., rival. Yet antitrust attorneys question whether the FTC wants to take on another complicated merger case after losing three significant court challenges last year. “The regulators lost a number of big rulings lately, so it’s critically important for them to bring a case they really can win,” said one antitrust expert who declined to be named. In the most visible defeat for enforcers, the Justice Department’s antitrust division in September lost its case to stop Oracle Corp.’s purchase of PeopleSoft Inc. That same month, the U.S. District Court for the Eastern District of Kentucky handed the DOJ another defeat by ruling that Dairy Farmers of America Inc., the world’s largest dairy cooperative, could maintain partial ownership of two rival milk producers. The agency had argued that Dairy Farmers’ control of the companies hurt competition for school milk contracts. The FTC last summer failed to stop Arch Coal Inc. from acquiring Triton Coal Co. when a district court ruled that enough coal producers would remain in Wyoming’s Southern Powder River Basin to preserve competition after the merger. These legal setbacks for the government could embolden Dallas-based Blockbuster to test the FTC in what would be a complex case, sources said. “Litigation defeats weigh on the antitrust agencies,” said David Balto, a partner in Robins, Kaplan, Miller & Ciresi’s antitrust practice in Washington. “They want to have an extraordinarily solid case, and few things are as slippery as rental movies.” Balto, a former policy director of the FTC’s bureau of competition, said much will depend on how the commission defines the video rental market. But other observers dismiss the chilling effect the losses could have on enforcers. “The FTC is not gun-shy — each case is an independent event and will be looked at with fresh eyes,” one antitrust expert said. One source close to the Blockbuster case said FTC staff is diligently compiling evidence, including hiring expert economists and interviewing witnesses in preparation for a possible trial. “Blockbuster and Hollywood [Entertainment] stores are located in all the same markets, and their internal documents will probably show they compete and are direct rivals,” said Andre Barlow, an attorney in the antitrust practice at Washington law firm Sheppard, Mullin, Richter & Hampton. Barlow also said the FTC may be more willing than the Justice Department to take on a tough merger challenge because it can pursue the case before an administrative law judge. “Once the DOJ loses, that’s the end of it,” he said. “The FTC can be more aggressive and ask for an administrative hearing and drag it on.” In reviewing Blockbuster’s offer for Hollywood Entertainment, the FTC must determine if there is sufficient competition to keep prices down in specific markets. But Michael Pachter, an analyst at Wedbush Morgan Securities Inc. in California, said the agency is unlikely to halt a deal in the ailing video rental industry, which has been hurt by online rental, pay-per-view and other competitive alternatives. “It’s a dying industry,” he said. “Rental prices haven’t gone up since 1984, so why does the FTC think Blockbuster is going to jack up rental prices now”? Whether the FTC seeks to block the deal will hinge on the agency’s definition of the video rental market, including whether online rentals and discounted sales of DVDs by retail competitors helps restrain industry pricing. Blockbuster has argued that such competition is national in scope and that its competitors include discount giants such as Wal-Mart Stores Inc. and Internet players such as Netflix Inc. “The sensible thing for the FTC to do is to make a decision consistent with the realities we’re experiencing and allow the shareholders of Hollywood to choose between the Movie Gallery and Blockbuster offers on their merits, without regulatory delay or interference,” said Randy Hargrove, a Blockbuster representative. Page Todd, executive vice president and general counsel of Movie Gallery, could not be reached for comment, but said in a recent statement that Blockbuster’s argument is based on an unrealistic and unsubstantiated definition of the market. If the FTC staff does recommend stopping the deal, the agency’s five commissioners would vote on the transaction. Blockbuster also could work out a settlement with the FTC that would ease antitrust concerns by pledging to sell off stores in its markets that overlap with Hollywood Entertainment outlets. Meanwhile, with the FTC expected to decide on the deal next month or request more time to pass judgment, Hollywood Entertainment shareholders must decide whether to bless Movie Gallery’s bid or gamble on Blockbuster’s richer offer. Copyright �2005 TDD, LLC. All rights reserved.

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