Objetivos específicos

33 mil.

Price $20

Mkt. Cap. $660

Cash 53

EV 607

EV/Op Inc. 6.53x EV/Forward 5.73x

TTM 3/31/2004

Rentals $663.4

Product 63.7

Total Revenue 727.0

Rental COGS 188.6

Rental GP 474.8

Rental GM 71.6

Product COG 48.4

Product GP 15.3

Product GM 24.0

Store opex 347.5

G&A 49.5

Op Inc. $93.0

from retailers, with 62% (returns) you build all day without screwing up. 62% returns on capital, you can't probably find better alternatives.

Even in year 1, it is 35% without it being mature. Particularly, a business trading at 6 x EBIT THROWING away money?

Year 1 Mature  Worthwhile

investment?

Investment $126 $126

4 wall operating profit $45 $79

Pre-tax ROIC 35.7% 62.7%

Now we get another piece on August 6^th, 2004 August 9, 2004

PORTLAND, OR, August 6, 2004 — Hollywood Entertainment Corporation (Nasdaq: HLYW), owner and operator of more than 1,950 Hollywood Video superstores, today announced that Leonard Green & Partners, L.P., an affiliate of Carso Holdings Corporation (“Holdings”) and its wholly owned subsidiary (the entities with which Hollywood entered into a merger agreement on March 29, 2004), has informed Hollywood that, due to industry and market conditions, Leonard Green & Partners believes that the financing condition to the consummation of the merger will not be satisfied.

Hollywood and the Special Committee of its Board of Directors are considering Hollywood’s alternatives to determine the course of action that would be in the best interests of Hollywood’s shareholders. There is no assurance that a merger with Holdings will be completed, or if completed, that it would be completed on terms that do not differ materially from those in the merger agreement.

It is kind of vague, but it --what is the most important sentence here besides you lose if you are in the stock and you are an arb.--Leonard Green is bowing out because of the financing condition. It wasn't because of the conditions or quality of HLYW's business. Leonard Green probably couldn't get something done in the high yield market. They are saying, we are not leaving the deal, but we don't like it at $14. So you can guess what happens now, so the stock trades back to $10. You know the financing didn't get done, the numbers are probably OK and you are back to where you were.

Everybody loves a good spin

 Viacom adds 1B of debt to Blockbuster and says don't let the door hit you on the way out.

 Ramifications of the newly independent BBI?

MOVI has traded down a little bit that day. At the same time as this, BBI is trending lower. Coincidently BBI pays a special dividend to Viacom after being spun-off from Viacom. Everything is bad at HLYW, Summer Redstone over at Viacom says BBI gives me a lower multiple, I am sick of it, get rid of it and at the same time pay a special dividend-$5. They kick it off. BBI had everything to look for in a spin-off that may be hated—

big debt load, bad industry, etc. Now BBI is completely independent. I missed this. I didn't get it.

More Chances to win..

 HLYW and MOVI trade down

--Significance of MOVI capital structure?

 Is MOVI affected?

 CEO of HLYW's thoughts?

HLYW and MOVI traded down. Since MOVI has cash on the balance sheet, a trade down in MOVI Gallery is huge, because it is cash rich. Any fall off in price is pretty significant on a multiple basis.

Is MOVI affected by what happened? NO.

What is the CEO of HLYW thinking about everything that is going on around him. This is the CEO who wanted to triple down. Does he care where the merger happens--he would prefer a lower price. He is more excited if Leonard Green comes back and offers $3. A take-under.

…and then it becomes a food fight

 Leonard Green comes back on 10/14/04 and offers $10.25

 On November 11/11, BBI confirms interest to acquire at $11.50

 Movi offers to acquire HLYW at $13.25.

Leonard Green shows up again on Oct 14^th. We will do it for $10.25, then they hang around. Classic private equity guys who say, the CEO doesn't care about a lower price, so let's offer $4 less. Then a wrench gets thrown in their plans, because a newly independent blockbuster comes back says they will do it for $11.50.

Then MOVI gets interested to acquire at $13.25. All these strategic buyers get excited. With a key event, you had a BBI spin-off and you had L. Green get greedy and then a food fight begins. It is funny how this stuff works. L Green woke everybody up to it is not so bad. Everything transpired from there.

The HLYW’s CEO offers to acquire half of HLYW's stores.

What I did when the merger announcement came out when Movi was going to acquire HLYW at $13.25, I said BBI runs into anti-trust problems because they have 60% of the market. You do some quick math on MOVI and say wow this is a home run. You can say they can cut costs, they can do the same thing as L. Green.

I am in MOVI but not in HLYW the second time around. Putting a 8 multiple on MOVI's $3.50, you could get a $28 stock. So you could get really excited with MOVI if they get it and if they don't, then a lot of time in these mergers, BBI is forced to sell off stores if BBI were to acquire HLYW, then MOVI could acquire those stores on the cheap.

Another thing about BBI's bid is that it is in cash and stock. And any Board of Directors will favor cash over stock. It is the easier to go with the cash bid. BBI is at a disadvantage because they have too much debt. This is what is happening with Quest and Horizon--MCI's Board is saying we want to go with Verizon since they are offering cash.

The HLYW's Board is tired. They know there is very little upside. They know it will be acquired. The Board personally does not want to be sued. Clean this up and get out of town.

Dynamics of merger

 Ex-Hollywood CEO comes out and wants to buy 1/2 HLYW stores

 MOVI All cash bid

--Quick math on MOVI acquisition says they could do $3.50 in EPS if they acquire HLYW

 Concessions from BBI if they don't win

 No overlap

 BBI issues --Antitrust

--Cash and stock bid

 Implications for the board

So we will just finish up the story. HYW trades back to $14 and MOVI to $26. BBI pops as well. You could do well in any of these companies.

END

Questions and Answers

I put 10% in HLYW, since I did all my work, I knew the downside was $9 to $10 and the upside was good.

For me, 20% would be huge, but 10% is usually my position.

What is your best bet--MOVI seemed better.

If you knew MOVI was a sure deal to acquire HLYW, then MOVI would be over $30.

In the end, people rent videos near where they live. With BBI, will it be able to be successful against Net-flix?

END