Blockbuster decides to drop Hollywood Entertainment bid

Blockbuster Inc, the US' largest video- rental chain, said it abandoned a US$929 million bid for Hollywood Entertainment Corp because of concern that US antitrust regulators would block the deal.

The US$14.50-a-share offer expired at midnight, Dallas-based Blockbuster said in a statement on Friday. US Federal Trade Commission lawyers recommended a court challenge of the plan, which would have paired the industry's two largest retailers, people familiar with the matter said earlier this month.

"The FTC was going to fight them all of the way," said Dennis McAlpine, an independent analyst in Scarsdale, New York, who rates Blockbuster "neutral" and doesn't own the shares. Dropping the bid "was smart on their part."

Blockbuster's lets Movie Gallery Inc, the No. 3 US video chain, press on with its approved US$850 million purchase of Wilsonville, Oregon-based Hollywood Entertainment. Video-retail chains are racing to merge and expand online-subscription services to confront competition from Internet-based rivals such as Netflix Inc, retailers including Wal-Mart Stores Inc and pay-per-view offerings from cable companies.

Blockbuster, spun off from Viacom Inc in October, will still be "dominant" in the movie-rental business with about 40 percent of the US market, McAlpine said. Hollywood and Movie Gallery together will have 25 percent of the market, said McAlpine, who rates Movie Gallery "buy."

Ending bid comes four days after former Hollywood chief executive officer Mark Wattles, 44, offered to help Blockbuster win FTC approval by buying as many as half of Hollywood's 2000 stores. Wattles founded Hollywood with his wife in 1988 and owns 9.6 percent of the shares.

Wattles in a March 22 interview that he wanted Hollywood to fetch the highest price and to again own video stores. Wattles waged an almost 12-month effort to purchase the company with Los Angeles-based buyout firm Leonard Green & Partners before he quit in February.

Blockbuster its first unsolicited offer for Hollywood Entertainment of US$11.50 a share on Nov. 11 and later raised the offer to US$14.50 by adding US$3 in stock on Feb. 2. The company decided "it is not in Blockbuster's best interest to continue to pursue the acquisition," Chief Executive Officer John Antioco, 55, said in Friday's statement.

"I am very surprised that they gave up without a fight," said Stacey Widlitz, an analyst at New York-based Fulcrum Global Partners LLC who rates Blockbuster "neutral" and doesn't own the shares. "It sounds like Blockbuster got wind of what the FTC wanted and it wasn't something they could live with."

Shares Blockbuster, whose biggest shareholder is billionaire Carl Icahn, rose US$0.14 to US$9.46 on Thursday on the New York Stock Exchange and have fallen 45 percent in past year.

Blockbuster's move is "a little bit uncertain," said Anthony DiClemente, an analyst at Lehman Brothers Holdings Inc, who rates Blockbuster "equalweight."

"The competition is not getting easier because you still have the overarching trend over the last five years of consumers buying DVDs instead of renting them," he said.