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Blockbuster Ends Effort To Acquire Competitor

Video Chain Drops Bid for Hollywood

By Mike Musgrove
Washington Post Staff Writer
Saturday, March 26, 2005; Page D12

Blockbuster Inc. said yesterday that it had dropped its $991 million offer to acquire rival video rental chain Hollywood Entertainment Corp., which officially expired Thursday at midnight.

Faced with a stagnant video rental market and increased competition for consumers' entertainment dollars, Blockbuster had hoped to expand its dominance of the market with the proposed acquisition.

Blockbuster expected regulatory delays over antitrust concerns, chief executive John F. Antioco said. (Richard Drew -- AP)

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In a statement, Blockbuster chairman and chief executive John F. Antioco said the company decided the merger was not in its best interests "after a careful review of all of the available facts and circumstances."

Blockbuster officials had said earlier this month that the Federal Trade Commission would probably try to block the deal on antitrust grounds. Antioco cited "the unlikely resolution of our request for regulatory clearance on an acceptable timetable" as one reason Blockbuster was giving up on the deal.

Media and entertainment analyst Dennis McAlpine said the FTC might oppose a Blockbuster-Hollywood merger because such a deal would have left some consumers with no other options for renting movies. Blockbuster, with about 5,000 stores in the United States, holds more than 40 percent of the video rental market, he said.

"The problem was that Hollywood had 75 percent of its stores located next to Blockbuster stores," he said. "[Hollywood's] strategy was to move their stores near Blockbuster's stores and try to steal some of their business -- it was a strategy that had proven successful for them over the years," he said.

Blockbuster initially offered to buy Hollywood in November. In February, the company increased its offer in hopes of wooing Hollywood away from Movie Gallery Inc., the nation's No. 3 video chain, which had made a competing bid. In a statement released Friday, Movie Gallery reiterated its interest in acquiring Hollywood and noted that such a deal has already received regulatory approval from the U.S. government.

Blockbuster's final offer was to buy all outstanding shares and senior subordinated debt of No. 2 chain Hollywood for $14.50 in cash and stock per share, compared with a $13.25-a-share offer from Movie Gallery, an Alabama-based company that has stores mostly in small towns and rural areas.

Dan Stanek, executive vice president at Columbus, Ohio-based retail consulting firm Retail Forward, said that Blockbuster has experimented with selling food and electronics at its stores and that the company needs to keep experimenting with such new business models. Though video rental is a $5 billion industry, video stores like Blockbuster are fighting for sales against a growing number of entertainment options.

"They are just being attacked from all angles now that consumers have more and more ways to get their entertainment," he said. "They're not just competing against theaters anymore. They're competing against TiVo, cable television channels offering pay per view and Netflix. And, down the road, consumers will get the option of downloading their entertainment."

In one attempt to bring back customers who have moved on to other such entertainment options, Blockbuster announced at the end of last year that it was doing away with late fees on movie rentals. (However, the company charges customers for the retail price of the DVD or videotape if they keep it too long.) Because of that policy, New Jersey's attorney general sued Blockbuster in February, accusing the chain of deceptive advertising and violating the state's consumer fraud laws.

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