Movie Gallery Buys Hollywood, as Its CEO Wattles Opens Talks With Ultimate
Just after Hollywood Entertainment CEO Mark Wattles disclosed to the SEC that he has begun negotiations with Ultimate Electronics on “a wide range of possible transactions,” including additional investment in the financially ailing retailer, Movie Gallery announced a definitive agreement Mon. to acquire the Hollywood chain for $13.25 per share. The deal amounts to about $850 million in cash, plus the assumption of $350 million in debt.
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Wattles, as part of an investment group backed by Leonard Green & Partners, had submitted one of 3 contending bids for Hollywood. The chain actually accepted a $10.25 per share offer from the Wattles group in Oct., but a month later Blockbuster entered the fray at $11.50 and had threatened to launch a hostile takeover if the chain didn’t negotiate. Movie Gallery’s offer hadn’t previously been disclosed.
The combined company will become the 2nd-largest N. American video rental chain behind Blockbuster, with annual revenue of $2.5 billion and 4,500 stores. “With a broader geographic presence and greatly improved distribution capabilities and scale, our combined company will be a strong competitor, well-positioned for continued success in urban, suburban and rural markets,” said Movie Gallery CEO Joe Malugen, who will become CEO of the combined company when the deal is completed in the 2nd quarter. Hollywood will become a subsidiary of Movie Gallery and will continue to operate under the Hollywood brand name, the announcement said. Hollywood and Movie Gallery will continue to operate their existing hq in Wilsonville, Ore., and Dothan, Ala., respectively.
As for Blockbuster, it still hasn’t given up hope of acquiring Hollywood Entertainment, which is still “number one on our radar screen,” CEO John Antioco told a Smith Barney investor conference Mon. in Phoenix. “We believe this would be a terrific acquisition for us. At the same time, we have been frustrated by the process that they ran, but we moved forward anyway.” Antioco said Blockbuster wrote Hollywood’s special committee, making special requests for information “that would allow us to potentially raise the price that we had on the table.” But with the Mon. morning announcement that Movie Gallery was the winning suitor, obviously “they've decided to go in another direction,” Antioco said. “We continue to assess our options and we remain very interested in them, but we will not pay more than we believe the company is worth.” As for the Movie Gallery offer, he said Blockbuster believes “the synergies associated with that acquisition” are no comparison with what would be possible under a Blockbuster-Hollywood partnership.
As for the Wattles talks with Ultimate, an SEC filing Fri. said they had begun in the last several days and were in the preliminary stages. Wattles, who spent $1.9 million of his personal assets last month to buy 9.8% of Ultimate (CED Dec 28 p2), could invest additional funds in connection with an Ultimate bankruptcy filing, the disclosure said. He began negotiating with Ultimate after the chain announced Dec. 30 it was in technical default on its loan for violating minimum-earnings covenants (CED Jan 5 p2), the filing said. Among the possible deals being negotiated is a debtor-in-possession loan to Ultimate by an entity controlled by Wattles, it said. Such a loan could be made as part of, or in place of, a larger credit facility Ultimate could sign with other lenders as part of a bankruptcy reorganization, the filing said. Wattles also may seek to acquire additional Ultimate equity or debt securities and may vie for one or more board seats as a result, the filing said.
Meanwhile, Ultimate’s Dec. sales plummeted 18% on a total and same-store basis, following a 6% same-store sales decline in Nov., the chain said Mon. It said its “serious liquidity problems” had adversely affected its inventory levels, and Jan. sales trends to date have continued “to show an increasingly negative trend.”
Movie Gallery’s acquisition of Hollywood comes as Hollywood is being threatened with a Nasdaq delisting for failing to hold a 2004 shareholders meeting. The chain has been granted a hearing to allow it to argue why it shouldn’t be delisted, but a date for the hearing hasn’t been set, a spokesman said. Hollywood didn’t forget to hold an annual meeting but believed it would have time to schedule a special meeting to vote on a buyout proposal before the end of the year, the spokesman said. By the time the company realized that it wasn’t ready to set a date, it was too late to schedule one in 2004, he said.