Certainly, when a company is in the process of being bought, there are reasons why a company's board would elect to accept a bid that does not yield the highest value per share for the shareholders on whose behalf it is supposed to be acting. Maybe one bid is all cash, and another one is in the form of common stock that management believes is overvalued by the market. Perhaps the terms of one proposed transaction are unacceptable and the risk of failing to reach a conclusion too dire to chance. And perhaps the cost of undoing an agreed-to deal would undo any benefit of taking a higher offer.
Like I said, there are reasons a management would accept a lower bid over a higher one. Maybe even good ones.
No such thing seems to be in evidence in the determination of Hollywood Entertainment's (NASDAQ:HLYW) board's urging shareholders to back the lowest of the three bids for the company, a going private transaction from buyout specialists Leonard Green Partners at $10.25 per share, a substantial discount from the current share price of $12.92. Other groups that have made bids for Hollywood include Blockbuster (NYSE:BBI) and Movie Gallery (NASDAQ:MOVI). The Movie Gallery bid is a bit of a mystery as the company declined to release specifics, but as it came late it would have to be at least as high as Blockbuster's $11.50 bid to have been competitive at all. Clearly with the share price where it is, the market anticipates that it is competitive and may lead to a bidding war between the two.
I detailed much of the landscape in a recent column, A Hollywood Blockbuster.
With these bids out there, why would Hollywood Entertainment's board push shareholders to accept a lower bid? Some shareholders point to a stark conflict of interest for CEO Mark Wattles. Under the Leonard Green Partners' plan, Wattles' interest in the company would increase from a current 11% to 50%, with about 10% being redistributed to senior executives. Such an outcome places the interests of Wattles in direct conflict with those of shareholders, for whom the only thing that matters in the event that the company goes private is the amount of money they will be paid for having the shares taken off of their hands. A management-led buyout that comes at a cost below others that are already on the table cannot and should not sit well. These people aren't holding out hope for a renaissance in the in-store video rental industry -- from Wal-Mart (NYSE:WMT) to Netflix (NASDAQ:NFLX) to Best Buy (NYSE:BBY), the competitive pressures are beating down this business from all sides. Hollywood Entertainment is for sale, and its shareholders would like the price to be dear.
Instead, the process of the sale has been so convoluted that it has dissuaded would-be buyers. Hollywood announced its agreement to be purchased by Leonard Green Partners early this year, but made it clear that it would consider other outside bids. When poor results caused Hollywood to be in default of the terms of the transaction, LGP dropped the offering price. All other terms stayed in place, which meant that even though LGP wasn't going to pay what it had earlier offered, the hurdle for other bidders was still pretty high. But Blockbuster's bid was 12% higher than the one on the table, which certainly ought to be enough to get folks back to the table.
Ought to have been, but for whatever reason, the board wants shareholders to stay the course. I hope that it is not surprised when shareholders fail to do just that.
Bill Mann owns no shares in any company mentioned in this article. He does own a GI Joe with Kung-fu grip. So there. Might "dying" businesses like the movie rental companies offer a bit more value than the market believes? Finding such opportunities is the enduring quest of Philip Durell and his team at the Fool's value-oriented newsletter: Inside Value. Take afree trialand find where he's been trawling for hidden value!
