Video rental giant Hollywood Entertainment Corp. has agreed to a buyout offer of about $850 million from smaller rival Movie Gallery Inc. in a deal that would create a stronger challenger to the indus

Video rental giant Hollywood Entertainment Corp. has agreed to a buyout offer of about $850 million from smaller rival Movie Gallery Inc. in a deal that would create a stronger challenger to the industry leader Blockbuster Inc.

But in a sign that Wall Street is betting the fight for Hollywood Entertainment may not be over, investors pushed its shares well above the offered price in early trading.

The planned combination of the No. 2 and No. 3 video rental chains, announced today (Jan. 10) would create a company with annual revenue of approximately $2.5 billion and approximately 4,500 stores.

That would still be a distant second to Blockbuster, which has 9,000 outlets worldwide.

Hollywood Entertainment, based in Wilsonville, Ore., near Portland, has been looking for a buyer for several months and had attracted bids from both Movie Gallery and Blockbuster as well as from a management group.

Blockbuster said late last month that it would launch a hostile bid for Hollywood Entertainment in January if the rival's directors won't negotiate a deal.

On Monday, Blockbuster spokesman Randy Hargrove declined to comment on the announced deal.

The agreement comes as traditional video rental companies are locked in a price war with online pioneer Netflix Inc. and Wal-Mart Stores Inc. for rentals ordered on the Internet and delivered through the mail.

Under the deal announced Monday, Movie Gallery would offer $13.25 a share, or about $850 million, in cash for Hollywood Entertainment's shares. It would also assume about $350 million in Hollywood's debt in the deal.

The offer represents a slim 1.5% premium over Hollywood Entertainment's closing price of $13.05 on Friday on the Nasdaq Stock Market.

In a sign that some investors expect a higher bid, Hollywood Entertainment shares climbed 56 cents, or 4.3%, to $13.61 in early trading in Nasdaq. Movie Gallery shares were up 30 cents at $19.37.

Joe Malugen, Movie Gallery's chairman/president/CEO, said in a statement that the deal would create a stronger competitor with "a broader geographic presence and greatly improved distribution capabilities and scale."

In August, Hollywood Entertainment agreed to let its chairman and chief executive and Los Angeles buyout firm Leonard Green & Partners take the company private for $10.25 a share. The deal, however, allowed Hollywood to solicit other bids, and the CEO said he welcomed Blockbuster's offer.

In November, Dallas-based Blockbuster offered $11.50 a share for Hollywood and said early in December that it may sweeten its offer for its rival.

On Nov. 19, Movie Gallery of Dothan, Ala., said it had offered an undisclosed amount for Hollywood.


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