In any major acquisition, there is a lag time between the announcement and its closing, which can easily last several months. As seen lately, markets can be quite volatile and make a deal look, well, like a raw deal. That's why the buyer and seller negotiate hard to craft contractual conditions to meet adverse changes.
And, last week, it happened with the going-private transaction of Hollywood Entertainment
As with any acquisition agreement, the deal for Hollywood Entertainment is complex. However, there is a clause that might be at issue: That is, Hollywood Entertainment must generate a minimum of $229 million in EBITDA during the last four quarters prior to the consummation of the deal.
It would not be surprising that the fundamentals are suffering at Hollywood Entertainment. The retail rental market is beset with sagging demand, as well as competitive forces, such as from retail giant Wal-Mart
Basically, the Hollywood Entertainment deal is a distressed sale. The valuation, when struck in March, was just under five times EBITDA. In other words, the buyer believes the company is declining.
And, like any good bottom-fisher buyer, it looks like it is now trying to get an even better bargain.
Fool contributor Tom Taulli is the author of The EDGAR Online Guide to Decoding Financial Statements. He does not own shares in any stocks mentioned.
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