PORTLAND— Video rental giant Hollywood Entertainment Corp. has agreed to a buyout offer of nearly $850 million from smaller rival Movie Gallery Inc. in a deal that would create a stronger challenger to the industry leader, Blockbuster Inc.
But in a sign that Wall Street is betting the fight for Hollywood Entertainment may not be over, investors pushed its shares well above the offered price.
The planned combination announced Monday of the No. 2 and No. 3 video rental chains would create a company with annual revenue of approximately $2.5 billion and approximately 4,500 stores.
That would still be a distant second to No. 1 Blockbuster which has 9,000 outlets worldwide.
The agreement comes as traditional video rental companies are locked in a price war with online pioneer Netflix Inc. and Wal-Mart Stores Inc. for rentals ordered on the Internet and delivered through the mail.
Hollywood Entertainment, based in Wilsonville, Ore., near Portland, has been looking for a buyer for several months and had attracted bids from both Movie Gallery and Blockbuster as well as from a management group.
Late last month, Blockbuster said it would launch a hostile bid for Hollywood Entertainment in January if the rival’s directors failed to negotiate a deal. Blockbuster had offered $11.50 a share for Hollywood.
On Monday, Blockbuster spokesman Randy Hargrove declined to comment on the announced deal.
Under the deal announced Monday, Movie Gallery would offer $13.25 a share, or about $850 million, in cash for Hollywood Entertainment’s shares. It would also assume about $350 million in Hollywood’s debt in the deal.
Joe Malugen, Movie Gallery’s chairman, president and CEO, said in a statement the deal would create a stronger competitor with “a broader geographic presence and greatly improved distribution capabilities and scale.”
Hollywood Entertainment shares climbed 80 cents, or more than 6 percent, to close at $13.85 Monday on the Nasdaq Stock Market, however, as investors wagered it would attract a higher bid. Movie Gallery shares closed up 95 cents, or almost 5 percent, at $20.02. Blockbuster shed 18 cents, or 1.9 percent, to $9.11 on the New York Stock Exchange.
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