Blockbuster Inc., the nation's largest video rental chain, withdrew its nearly $1-billion bid Friday to acquire No. 2 player Hollywood Entertainment Corp., citing fears that federal antitrust regulators would try to thwart the purchase.
The move clears the way for the nation's No. 3 video rental company, Movie Gallery Inc., to buy the Wilsonville, Ore.-based operator of the Hollywood Video chain for $850 million.
Blockbuster said its cash-and-stock bid valued Hollywood Entertainment at $14.50 a share. It also included the assumption of $350 million in debt. Movie Gallery valued its bid at $13.25 a share.
Blockbuster executives said they believed the Federal Trade Commission was planning to sue to halt its hostile takeover bid, based on a meeting they had last week with FTC staff. FTC officials apparently were concerned that a Blockbuster-Hollywood union would give it too much control over pricing.
Concerns that the company wouldn't be able to secure FTC approval effectively scuttled the acquisition, the Dallas-based company said.
Analysts said Blockbuster winced at the prospect of a lengthy court battle with the FTC.
"It would have been a very expensive litigation," said Michael Pachter, an analyst for Wedbush Morgan Securities.
Hollywood Entertainment's shareholders are expected to meet April 22 to vote on Movie Gallery's offer, which has been recommended by Hollywood's board of directors. The FTC has given its blessing to Movie Gallery's bid.
The acquisition would give Dothan, Ala.-based Movie Gallery, which operates in all 50 states and primarily serves rural areas, a 25% share of the U.S. market, compared with Blockbuster's 40%. It would expand the company's presence in the western United States -- including California.
"We'll still be the No. 2 competitor, [but] we'll be a much bigger and stronger competitor," said Thomas Johnson, a Movie Gallery senior vice president.
Hollywood Entertainment would retain its brand name and be run as a separate division at its current headquarters, Johnson said. Because there is little overlap between the companies' 4,500 stores, Johnson said, no store closures are planned.
Blockbuster's decision brightened Movie Gallery's immediate prospects, analysts said. The company reported a 35% drop in profit for its fourth quarter ended Jan. 2, partly because of an accounting change for leases. But the company's stock has been rising as investors anticipated the acquisition.
Mark Wattles, who founded Hollywood Entertainment in 1988 and resigned last month, offered Tuesday to buy some of the chain's 2,000 stores so Blockbuster could acquire the company.
Blockbuster executives have argued that merging with their smaller rival wouldn't be anti-competitive, given the changing market. Movie rental stores must now contend with online rental services such as Netflix Inc. and cable and satellite companies that deliver movies directly to customers' TV sets, analyst Pachter said.
Customers also are increasingly buying movies rather than renting them, Pachter said, particularly from discount retailers such as Best Buy Co. and Wal-Mart Stores Inc. Movie rentals have declined 10% nationwide since 2001.
In a defensive move, Blockbuster launched an online rental service and recently introduced an advertising campaign announcing the end of late fees.
Several states have complained that the campaign is misleading. New Jersey sued the company, alleging customers could be forced to buy movies they failed to return on time.
Rising costs associated with online rentals and the promotion have cut into Blockbuster's operating profit. And now, said independent analyst Dennis McAlpine, Blockbuster will have to confront a larger competitor.