The nation's two largest video store chains, Blockbuster Inc. and Hollywood Entertainment Corp., have faced some of the same struggles in recent years as new options for watching movies have steadily eroded the traditional rental business.

Yesterday, Blockbuster went public with its proposed solution: acquiring Hollywood Entertainment.

The unsolicited bid, which Blockbuster valued at about $1 billion, would give the combined company half the approximately $10 billion traditional video rental market and add 1,800 Hollywood Video stores to Blockbuster's 8,900-store network.

Dallas-based Blockbuster offered $11.50 per share in cash for Hollywood, plus the assumption of about $300 million in Hollywood debt. Hollywood stock closed at $10.93 yesterday, up $1.13. Blockbuster's stock was up 82 cents at $8.20.

The proposal represents a 12 percent premium over an October merger agreement between Wilsonville, Ore.-based Hollywood Entertainment and the Los Angeles buyout firm Leonard Green & Partners LP. Neither company responded to calls yesterday. But Hollywood founder and chief executive Mark J. Wattles told the Associated Press that the company will continue to accept bids. He also indicated that the Leonard Green bid, of which he is a part, may still be viable.

Blockbuster cast the proposal as an opportunity for the combined company to better compete in a market that has evolved to give consumers far more options for getting movies, including DVD sales at major retailers such as Wal-Mart Stores Inc., mail-order services such as Netflix Inc. and video-on-demand services.

"In addition to providing Hollywood Entertainment shareholders with a substantial premium for their shares, the proposed transaction would give us more ways to serve more customers by taking advantage of both companies' combined store distribution capabilities and brand portfolios," Blockbuster chairman and chief executive John Antioco said in a statement.

But it's far from clear whether the deal will go through.

The merger is subject to shareholder approval, and it must receive the blessing of the U.S. government. Antitrust experts say the prospect of a single firm controlling such a wide swath of the rental market is likely to draw scrutiny from the Department of Justice, the Federal Trade Commission and state attorneys general.

"You scratch your head and say, 'Why are they doing this other than to control a larger share of the market, raise prices and reduce competition?" said Bruce Fein, a former attorney in the Department of Justice's antitrust division.

Blockbuster, spun off by Viacom Inc. last month, is hoping antitrust enforcers look at the video market broadly to include not just stand-alone rental stores, but also big-box retailers and Netflix. Seen that way, a combined Blockbuster-Hollywood Entertainment would only control a small fraction of the market.

"We really believe that people are going to look at this reasonably and see the marketplace has changed," said Karen Raskopf, a Blockbuster spokeswoman. "We're not just competing against video retailers any more. Those days are long gone."

But Mark S. Ostrau, co-chair of the antitrust practice at Fenwick & West LLP in Mountain View, Calif., said Blockbuster is trying to justify the deal on business grounds by claiming that consumers still regard video stores as a distinct option.

Some of the debate, he said, could come down to how accessible an online option like Netflix really is for consumers. Netflix customers select their movies online and then DVDs are shipped to them by mail. As one is returned, another is sent out. "You could make the case that there is a sub-group of consumers for whom the mail order service is just not a good substitute," Ostrau said. "This is a pretty good candidate for an extensive investigation."

Ostrau compared this deal to a proposed merger between Office Depot and Staples several years ago. In that case, the companies argued they were part of a broader market that included other stores that sold office supplies, including Wal-Mart. But the FTC shut the deal down anyway, scuttling a merger of the two office superstores.

Michael Pachter, a research analyst at Wedbush Morgan Securities, is more optimistic, saying regulators may decide they favor "one strong company over two weak ones."

Same-store sales among video stores have been on the decline in recent years, and both Blockbuster and Hollywood have had to deal with shifts in technology and retail strategy that cut away from their core business. Blockbuster earlier this year opened an online service similar to Netflix's, putting the two companies in a bidding war for the affection of customers who don't mind waiting for their movies to come in the mail. Blockbuster has also had to manage the transition from VHS to DVD, and has had to broaden its focus to include surging demand in the video game market.

Pachter said one big driver for Blockbuster in trying to acquire Hollywood is that Hollywood is further along in developing its video game business, having opened more than 550 Game Crazy stores within its Hollywood Video stores.

Standard & Poor's was less enthusiastic about the potential upside for Blockbuster, warning that it may cut its rating on the company because of uncertainty over the company's post-merger balance sheet. Rival Netflix also expressed doubt: "It's really one money-losing business acquiring another," said Shernaz Daver, a Netflix spokeswoman.

But Arvind Bhatia, equity analyst at Southwest Securities, said he sees potential virtue in the deal, with a combined firm gaining leverage while cutting overhead. Blockbuster, he said, may be able to close some unprofitable locations in areas where Blockbuster and Hollywood Video stores now directly compete. "There's a lot of overlap between the two companies," he said.

Consumers, he said, may see modestly higher prices if the deal goes through. But he doubts Blockbuster would be able to raise rental fees too much, given the multitude of other options for finding a Friday night flick.

"This is a business where the consumer is going to be able to have an influence on pricing," he said.

Ernest Polite, left, returns DVDs at a Blockbuster box in South Orange, N.J., yesterday. Customers leave a Hollywood Video store, right, in Montclair, N.J. Both chains have struggled in recent years, fighting off competition from major retailers and Netflix.