BUYOUT PROCESS AT HOLLYWOOD ENTERTAINMENT BEGAN DEC. 10, PROXY SAYS
Hollywood Entertainment CEO Mark Wattles favors taking the company private through a management-led buyout (CED March 30 p8) to give it “greater operating flexibility” and eliminate “the constraint of the public market’s emphasis on quarterly earnings,” Hollywood said in a preliminary proxy statement filed Fri. at the SEC. The proxy was for a special shareholders meeting to be convened to vote on the proposed buyout. No meeting date is set, but Hollywood has said it expects the buyout to be completed by 3rd quarter and the proxy said the deal would be consummated soon after shareholders approve it.
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The proxy said Wattles initiated the buyout process at a board meeting last Dec. 10, when he authorized UBS Securities to contact Leonard Green & Partners, the L.A.-based equity firm ultimately chosen as the buyer. Wattles was motivated by Viacom’s failure to find a buyer for Blockbuster and its decision in Feb. instead to spin off the rental chain through a tax-free stock swap, the proxy said. It said he also was prompted to act by “other industry and market conditions,” including a 50% plunge in Hollywood’s stock price.
The agreement ultimately reached would pay shareholders $14 per share cash, representing a premium of over 25% from the average trading price for the 30 days before the announcement and a 30% premium from the $10.70 closing price the last trading day before the announcement, the proxy said. The stock since has climbed and hovered around $13.50. On Feb. 19, the proxy said, Leonard Green & Partners offered $13 a share and asked for 45 days’ exclusivity, during which the offer would terminate if it became public, the proxy said. A special committee appointed by the board rejected the $13 offer and exclusivity request the next day and held “lengthy discussions” about whether to solicit additional bidders, the filing said. The proxy disclosed that Wattles had discussions with an unidentified “private” equity firm with which he had a prior relationship, but that firm eventually withdrew from contention.
Concerned that opening up the bidding could produce a news leak, the committee decided to confine negotiations to the Green firm, the proxy said. The committee feared a leak might cause volatility in Hollywood’s stock price, which would discourage Leonard Green & Partners or other bidders from “aggressively seeking an acquisition,” the proxy said. It also feared that rumors of an acquisition would harm employee morale, the filing said.
Hollywood must pay a termination fee of $26.5 million plus up to $3 million in legal costs and other expenses if it backs out of the deal or accepts a “financially superior proposal under specified conditions” from another bidder, the proxy said. The committee said those fees are less than the average assessed in deals involving similarly sized companies since Jan. 1999.
In financial projections given Leonard Green & Partners, Hollywood forecasts total revenue rising 32% in 2004, 12.8% in 2005, 14.5% in 2007, 7.4% in 2007 and 5.8% in 2008. Profit is expected to rise 12.6% in 2004, 18.1% in 2005, 7.8% in 2006, 12.7% in 2007 and 5.8% in 2008. The proxy gave no back-up for the projections -- only a long list of disclaimers. “We do not as a matter of policy make public forecasts or projections of future performance or earnings,” Hollywood said. These projections “were not prepared with a view toward public disclosure” or compliance with SEC or accounting industry standards, it said. The projections were included in the proxy only “to give our shareholders access to information that was not publicly available and that we provided in connection with the merger,” the company said.