PRINT THIS STORY:

CHANGE TEXT SIZE:

MOVIE GALLERY TO BUY HOLLYWOOD

BY BRANNON BOSWELL

Movie Gallery said it will buy Hollywood Entertainment Corp. for $1.2 billion, including $350 million in assumed debt. The new entity will be the second-largest North American movie-rental company, with $2.5 billion in annual revenue and 4,500 stores in the United States, Canada and Mexico.

Blockbuster, which was also pursuing the acquisition, operates about 9,000 stores around the world.

The deal heralds a future in which “you will have two big movie-rental companies, and everyone else is going to get acquired,” said Dennis McAlpine, managing director of Scarsdale, N.Y.-based research firm McAlpine Associates.

Hollywood Entertainment will become a subsidiary of Movie Gallery but continue operating under the Hollywood banner out of its Wilsonville, Ore., headquarters. Joe Malugun, Movie Gallery’s chairman, president and CEO, will be chief executive of the combined company.

Malugun said in a press release that few of the two companies’ stores overlap and that the merger will bring a broader geographic presence and yield improved distribution capabilities.

Movie Gallery actually beat out two rivals. Movie-rental monolith Blockbuster, based in Dallas, had offered shareholders about $1 billion, including the assumption of debt, for Hollywood Entertainment. In December Blockbuster said it would make a hostile bid after Hollywood Entertainment rebuffed its previous offers. Buyout firm Leonard Green & Partners, Los Angeles, got into the act, putting in a bid of about $619.7 million.

Dothan, Ala.-based Movie Gallery, which operates 2,475 stores, has purchased more than 200 companies in the past 10 years. Movie Gallery’s board has signed off, but the deal awaits the green light from government regulators and the Hollywood Entertainment board.

Regulators are unlikely to worry about a Movie Gallery and Hollywood Entertainment combination, because the two would control only about 20 percent of the market, says McAlpine. If Blockbuster had won the bid, however, the combined company’s market share would have been “50 percent or greater, and there would be much more concern,” he said.

Hollywood Entertainment operates about 1,920 Hollywood Video stores and 600 GameCrazy stores in the United States.