DALLAS (AP) – Blockbuster Inc., facing new attacks from big retailers and online operators, has offered $700 million for rival Hollywood Entertainment Corp. in a bid to combine the two biggest players in the movie-rental industry.

Blockbuster, the biggest in movie rentals, said Thursday that it had communicated its interest to No. 2 Hollywood Entertainment but that there have been no substantive talks on terms of a deal.

Hollywood Entertainment is already in a deal to let its chairman and chief executive and a buyout firm take the company private. The agreement, however, allowed Hollywood to solicit other bids, and the CEO said he welcomed Blockbuster’s offer.

The deal would give Blockbuster, which already has 9,000 outlets worldwide, more than 1,920 Hollywood Video stores and 600 Game Crazy specialty stores. But it could also raise antitrust questions.

In 1999, a plan by the two companies to rename Hollywood stores under the Blockbuster banner was stopped by the Federal Trade Commission, but analysts say a merger of the two largest movie-rental firms stands a better chance now.

Stacey Widlitz, an analyst for Fulcrum Global Partners, said regulators would probably block Blockbuster’s plans if they considered the movie-rental business as a distinct industry, but not if they lumped rentals with retail sales of DVDs and games. Widlitz said the combined company would control about half the U.S. rental business but only about 20 percent of rentals plus retail sales.

Dallas-based Blockbuster said it offered $11.50 per share, a 17 percent premium over Wilsonville, Ore.-based Hollywood Entertainment’s closing price Wednesday of $9.80 per share, and would assume about $350 million in Hollywood Entertainment debt.

The deal would trump the pending bid of $10.25 per share for Hollywood Entertainment by a Los Angeles buyout firm.

In afternoon trading, Blockbuster shares were up 58 cents, or 7.9 percent, to $7.96 on the New York Stock Exchange, and Hollywood Entertainment shares rose $1.15, or 11.3 percent, to $10.95 on the Nasdaq Stock Market.

Retailers such as Wal-Mart Stores Inc. sell DVDs so cheaply that they tempt movie renters. In addition, Blockbuster now faces competition from subscription online rental operators such as Netflix Inc.

The new nature of the competition was reflected in recent price cuts by leading providers of Internet movie rentals. Netflix and Blockbuster knocked more than 10 percent off their monthly online subscription rates, and Wal-Mart jumped into the fray by undercutting both. The price war was triggered by Netflix’s fear that Amazon.com Inc. would muscle into the business.

“The four companies are going to beat each other to death,” said the analyst Widlitz. She was lukewarm on Blockbuster’s bid: “It’s one company in a declining business buying another.”

Marla Backer, an analyst for Research Associates, said Hollywood Entertainment shareholders should “take the money and run” but that Blockbuster would inherit a company facing the same competitive pressures that it does. She said Blockbuster would be wiser to invest in electronic delivery of movies.

John Antioco, Blockbuster’s chairman and chief executive, said in a statement that the proposed deal “better positions Blockbuster to compete in the rapidly changing home entertainment marketplace, while simultaneously benefiting consumers as well as Blockbuster and Hollywood Entertainment shareholders.”

Blockbuster said buying Hollywood Entertainment would immediately add to its earnings per share and cash flow.

By making its bid, Blockbuster was attempting to exploit an opening left in a pending bid from Los Angeles-based buyout firm Leonard Green & Partners LP and Hollywood Entertainment’s CEO, Mark J. Wattles, who founded the company in 1988. Green and Wattles agreed to buy the video chain in March for $14 per share, but last month, a committee of Hollywood Entertainment’s independent directors announced changes in terms of the deal – the price fell to $10.25 per share, and Hollywood Entertainment was freed to solicit competing proposals.

A call to the investment banker handling the Leonard Green deal for Hollywood Entertainment was not immediately returned.

Wattles said the company began soliciting offers three weeks ago and expects more bids.

“Leonard Green and I are not exactly backing off,” he said. “I’d like very much to buy the company. If somebody can ultimately pay more than what Leonard Green and myself are willing to pay, then I won’t own the company.”

AP-ES-11-11-04 1629EST

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