Blockbuster said yesterday that it has dropped its $991 million offer to acquire rival video-rental chain Hollywood Entertainment, which...

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WASHINGTON — Blockbuster said yesterday that it has dropped its $991 million offer to acquire rival video-rental chain Hollywood Entertainment, which officially expired Thursday at midnight.

Faced with a stagnant video-rental market and increased competition for consumers’ entertainment dollars, Blockbuster had hoped to expand its dominance of the market with the proposed acquisition.

In a statement, Blockbuster Chairman and Chief Executive John Antioco said that the company decided the merger was not in its best interests “after a careful review of all of the available facts and circumstances.”

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Blockbuster officials had said earlier this month that the Federal Trade Commission (FTC) would probably try to block the deal on antitrust grounds.

Media and entertainment analyst Dennis McAlpine said he expected FTC opposition to a Blockbuster-Hollywood merger because such a deal would have left some consumers with no other options for renting movies. Blockbuster, with about 5,000 stores in the United States, controls more than 40 percent of the video-rental market, he said.

“The problem was that Hollywood had 75 percent of its stores located next to Blockbuster stores,” he said. “[Hollywood’s] strategy was to move their stores near Blockbuster’s stores and try to steal some of their business — it was a strategy that had proven successful for them over the years.”

Blockbuster initially offered to buy Hollywood in November. Last month the company increased its offer in hopes of wooing Hollywood away from Movie Gallery, the nation’s No. 3 video chain, which had made a competing bid. In a statement released yesterday, Movie Gallery reiterated its interest in acquiring Hollywood and noted that such a deal has already received regulatory approval.

Blockbuster’s final offer was to buy all outstanding shares and senior subordinated debt of No. 2 chain Hollywood for $14.50 in cash and stock per share, compared with a $13.25-a-share offer from Movie Gallery, an Alabama-based company that has stores mostly in small towns and rural areas.

The price difference between the bids, however, was not as crucial as the fact that Movie Gallery won swift antitrust approval while Blockbuster ran into problems at the FTC.

Larry Denedy, a spokesman for Hollywood, said of Blockbuster’s retreat, “This is what we had said all along, that we thought [Blockbuster’s bid] was going to run into problems.”

One more offer remains active. Former Hollywood CEO Mark Wattles has proposed buying up to 1,000 Hollywood Video locations, or about half the chain, as a way to make the higher Blockbuster bid more palatable to antitrust regulators.

Yesterday, Movie Gallery Senior Vice President Thomas Johnson characterized Wattles’ offer “as a distraction with Blockbuster now out of the picture. We’re looking for a quick closing and don’t see any more obstacles.”

Dan Stanek, executive vice president at retail consulting firm Retail Forward, said that Blockbuster has experimented with selling food and electronics at its stores, and that the company needs to keep experimenting with such new business models. Though video rental is a $5 billion industry, video stores like Blockbuster are fighting for sales against a growing number of entertainment options.

“They are just being attacked from all angles now that consumers have more and more ways to get their entertainment,” he said. “They’re not just competing against theaters anymore. They’re competing against TiVo, cable television channels offering pay per view and Netflix. And, down the road, consumers will get the option of downloading their entertainment.”

In one attempt to bring back customers, Blockbuster announced at the end of last year that it was doing away with late fees on movie rentals. But the company charges customers for the retail price of the DVD or videotape if they keep it too long.

New Jersey’s attorney general sued Blockbuster last month, accusing the chain of deceptive advertising and violating the state’s consumer-fraud laws, because of that policy.

Hollywood spokesman quote provided by The Associated Press. Wattles’ offer and Movie Gallery’s response provided by The Dallas Morning News.