Hollywood Sellout?

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Hollywood Entertainment's (Nasdaq: HLYW) shareholders woke up to a nice 30% gain this morning on news of a $14 per-share private buyout by Leonard Green and Partners. The deal will give Chairman and CEO Mark Wattles about half of the private company.

Is this a good deal for shareholders? With the stock trading recently under $11 per share, a level it hasn't seen since the fall of 2001, you could argue that this is a kind way of putting stockholders out of their misery. Of course, anyone who bought before November 2003 is likely to be looking at a loss.

If I held shares, I'd probably be happy to get rid of them. Over the past couple of years, 80% or more of the firm's cash flow from operations has been consumed by capital expenditures. It has also spent nearly the same amount repaying debt. That means cash has been coming from the issuance of more debt -- or stock -- which is not the greatest way to fund a business with dwindling prospects.

In January, we looked at Hollywood's warnings and the consequences of the sagging rental market. In discussing a potential spin-off from Viacom (NYSE: VIAB) last month, W.D. Crotty looked at the similarly anemic numbers at No. 1 Blockbuster (NYSE: BBI).

The major problem seems to be that game and DVD sales are picking up at the expense of rentals. That's not quite the case at my house, where we just signed up for Netflix (Nasdaq: NFLX), and swore never to visit either of our two neighborhood Hollywood outlets.

Convenience is the main issue for us, and quite frankly, as gridlock increases, getting to the strip mall is about as pleasant as Dustin Hoffman's dental treatment in Marathon Man. The usual 15-minute wait for disgruntled employees to grudgingly check us out and the fatally fingerprinted discs sealed the deal.

With customers like us, I wonder about the firm's potential. Hollywood's shareholders ought to take the money and run. There are better places to invest -- and get movies.

Discuss the cinema on the Fool's Great Movies discussion board.

Fool contributor Seth Jayson has a Netflix cue a mile long. He has no stake in any company mentioned above. View his Fool profile here.