Hollywood Entertainment Accepts Lower Buyout Price Offer

Hollywood Entertainment Corp. (HLYW), the No. 2 U.S. video store chain, has agreed to take less cash in a buyout deal with Leonard Green & Partners LP (search), citing changing industry conditions, Hollywood said Thursday.

Under the new deal, shareholders would receive $10.25 in cash per share, down from a previous offer of $14. The lower offer, which came despite growing calls for the company to abandon a buyout, values the chain at about $619.7 million.

In March, when Hollywood unveiled the initial offer, the company was valued at about $890 million.

Its stock, down nearly 30 percent since the first offer was made public in March, rose 60 cents, or 6.4 percent, to $10 on Nasdaq Thursday.

Dennis McAlpine, an analyst at McAlpine Associates (search), said the stock rose mainly from short-covering by contrarian investors that had bet the deal won't happen.

The reduced price, he said, "raises questions about the valuation of the (movie rental) industry" and suggests the company failed to get a higher price from other potential suitors.

Hollywood and top rival Blockbuster Inc. (BBI) have struggled as more people buy DVDs instead of renting them. The company indicated earlier this month it might entertain a cut-price proposal after Leonard Green said initial terms could not be met because of industry and market conditions.

The Portland, Ore.-based video store chain said the revised agreement included changes that were intended to make the deal's completion more likely. Chief Executive Mark Wattles would continue in his current role.

Wattles, also the founder and chairman, would contribute all of his equity holdings in exchange for equity of the new entity.

Opposition to the agreement, however, has been growing.

On Wednesday, Contrarian Capital Management, a fund controlling some 1.9 million Hollywood shares, asked the company to rethink a buyout, saying it was not in the best interest of shareholders.

The fund, based in Greenwich, Conn., is the second big investor in recent weeks to publicly call on Hollywood to consider a recapitalization and pay a dividend to shareholders rather than pursue a buyout.

Both funds have said they had questioned why a $15 million loan to Wattles was written off in December 2000 by the company.

Contrarian said it was evaluating all possible courses of action to protect its investment, implying it may undertake a proxy fight to force changes at Hollywood. It had no immediate comment about the revised offer.