OnTheBlock: Hollywood Entertainment Ponders Its Next Scene as Its Stock Falls

Is Hollywood Entertainment Corp. auditioning for an LBO? The company has produced respectable and profitable growth at its core Hollywood Video movie rental chain, the nation’s second-largest, and runs an increasingly popular, albeit typically money-losing web site, but has been royally panned by investors. At the end of April, the stock was down nearly 80% from its 52-week high. Mark Wattles, chairman and CEO who made a pass at taking the company private about two years ago, has stated that current characteristics are conducive to giving it another shot. But exactly what track Hollywood will follow is basically up in the air until Donaldson Lufkin & Jenrette Inc. sorts things out. The investment bank was hired to explore strategic alternatives for enhancing shareholder value – with an LBO listed alongside a sale, divestiture, and a strategic partnership among the possible outcomes. While the DLJ review is underway, Hollywood Entertainment likely will hold up the equity carve-out of its reel.com web site, which has registered an IPO with the Securities and Exchange Commission. Reel.com is a channel for online ordering of movies and videos and provides a plethora of information about the motion picture field. Retailers generally have not been treated well by the stock market recently and many of those with e-commerce offshoots haven’t been rewarded for their efforts to move up the ladder of merchandising technology. Hollywood Entertainment, based in Wilsonville, Ore., may be among them. One of the issues DLJ will grapple with is whether traditional bricks-and-mortar retailing and so-called “e-tailing” belong in the same house, especially when the web-based operations drag overall results – which is the situation at Hollywood. Company spokesman Sean Mahoney said that Hollywood Video believes it is not getting appropriate credit for the strength and growth of its core video superstore business. “There seem to be two different types of investors,” he said, “Some are seeking to invest in the Internet while others prefer the traditional retailer with steady cash flow.” Mahoney said that Hollywood has confronted similarly bifurcated choices from potential buyers that have approached the company. “Some are interested in reel.com,” he said. “Others are interested Hollywood Video. They usually don’t want both. We figured this was the best time to seek out the experts.” Hollywood also has scaled back its internal expansion, Mahoney said. After opening more than 350 stores annually in 1997, 1998, and 1999, the company has cut the number of planned launches to about 250 in 2000. Mahoney said that Hollywood felt it could slow down because it has achieved desired penetration in many of the markets it has targeted. With more than 1,700 units, Hollywood is but a fraction of the size of video rental leader Blockbuster Inc., which operates about 7,300 outlets. Wattles says that Hollywood Video rolled up 1999 sales of about $1 billion and notched EBIT-DA of more than $200 million, up 58% from the 1998 level. However, after inclusion of reel.com and extraordinary items, Hollywood Entertainment had a net loss of nearly $51.3 million on total revenues of nearly $1.1 billion. Hollywood shares closed April 28 at 7 on Nasdaq, near the low of a 52-week range of 6-1/16 to 28-1/8. Carey International Checks Its Route Carey International Inc., the leading consolidator in the field of providing chauffeured services for limousines and other vehicles, is reviewing where it wants to go next. After suffering a sharp earnings decline in the first fiscal quarter ended February 29, the Washington-based company belatedly announced that the investment banking firm of Benedetto, Gartland & Co. had been retained last fall to explore strategic alternatives for raising shareholder value. Garry L. Kessler, vice president of corporate development at Carey, said that there would be no comment beyond the initial terse statement. Between its own companies, many of which were steered in via acquisitions, licensees, and affiliates, Carey claims coverage of 480 cities in 75 countries with chauffeured limousine, sedan, van, and minibus service. The company had a good year in the 12 months ended Nov. 30, 1999, by boosting earnings to $11.8 million, or $1.17 a share, from $8.4 million, or 92 cents, the year before as revenue rose to $191 million from $123.2 million. However, the profit machine creaked in the latest quarter when earnings fell to $1 million, or 10 cents a share, from $1.7 million, or 17 cents, a year earlier while revenue climbed to $48.9 million from $36.4 million. Vincent A. Wolfington, chairman and CEO, blamed the drop primarily on the higher costs of financing growth in the business. Should Carey go the sale route, it may be hard to find a corporate buyer with an obvious strategic fit, since the company is regarded as the only pure play in chauffeured vehicle services. However, Carey could appeal to a financial acquirer. Carey stock has been weak. It closed April 28 at 9-1/4 on Nasdaq, at the low end of a 52-week range of 6-1/2 to 27. Review Launched By Sybron Chemicals Sybron Chemicals Inc. launched a review of strategic alternatives at a time when chemical firms are hot properties amid the restructuring of the industry. J.P. Morgan & Co. was engaged as adviser to the Birmingham, N.J.-based maker of chemicals for the textile industry, water and waste treatment chemicals, and polymer intermediates for coatings. The company said that the review was unanimously approved by its board, including the representative of Citicorp Venture Capital, the largest shareholder with an interest of about 35%. In the fourth quarter of 1999, the company wrote down the value of “certain intangibles” in its textile chemical business by more than $10.9 million, which contributed to a sharp decline in net income to $3 million, or 52 cents a share, for the year. Sales were $269.1 million against $222.8 million. Sybron stock spurted on the news of the review. Its shares closed on the American Stock Exchange on April 28 at 18-1/4 versus a close of 11 on April 25, the day before the announcement. The action moved the stock to near the 20-1/2 peak of the 52-week price range from the trough point of the range. In other strategic reviews launched during April: InterDent Inc., a dental practice management firm based in El Segundo, Calif., whose acquisition by Leonard Green & Partners LP fell through, hired Lehman Brothers Inc. to find alternate buyers or financing arrangements. InterDent said later that it received a $30 million financing commitment. Advanstar Inc., a business magazine publisher controlled by the Hellman & Friedman buyout firm, retained Morgan Stanley Dean Witter & Co. and Peter J. Soloman Co. to apparently find a buyer. The Boston-based company previously had been planning an IPO. Getty Petroleum Marketing Inc., a Jericho, N.Y.-based operator of gasoline stations in the Northeast which has been dissatisfied with its stock price, tested the market for a sale or merger by retaining ING Barings. Sight Resource Corp., an optical care provider headquartered in Holliston, Mass., retained PaineWebber Inc. because its stock price “does not reflect the underlying value of the company.” Roy F. Weston Inc., an infrastructure engineering firm based in West Chester, Pa., retained Raymond James & Associates Inc. and named a special committee of independent directors to work with James and represent public shareholders. The Weston family controls most non-public shares. Stoneage.com, a Troy, Mich.-based operator of a consumer-oriented automotive information web site, assigned Salomon Smith Barney Inc. to “explore strategic financial alternatives.” Lumisys Inc. retained Warburg Dillon Read LLC to check out alternatives for the Sunnyvale, Calif., company, which specializes in Internet systems and services for medical imaging. MedCare Technologies Inc., a health care services firm based in Oak Brook, Ill., tapped Arthur Andersen LLP’s Global Corporate Finance Group for advice. American Eco Corp., a Houston-based provider of outsourcing services, engaged Houlihan Lokey Howard & Zukin. Updates: Mitchell Energy & Development Corp., The Woodlands, Texas, decided to remain an independent, publicly traded company after a review. The independent oil and gas company will compress its Class A and Class B shares into a single voting class, launch a stock buyback, and reduce debt. Inso Corp., Boston, put its Information Exchange Division up for sale, and will remain a public company focused on its DynaBase web publishing system. StaffMark Inc., after a review conducted by Credit Suisse First Boston Inc., decided to recast its growing Edgewater electronic commerce and Internet professional services unit as its core business. Key steps include an IPO in the U.K. for the Robert Walters consulting unit, with the proceeds earmarked for pruning debt, and a possible divestiture of the commercial services and professional staffing businesses. Angelica Corp., Chesterfield, Mo., dropped plans to sell all or parts of the firm on the grounds that staying independent would produce more shareholder value in the future. However, the uniform manufacturing and service firm, which has been advised by Banc of America Securities, said it would evaluate other alternatives. PlayCore Inc., a Janesville, Wisc.-based playground equipment maker, agreed to be acquired by financial buyer Chartwell Investments for $10.10 a share, or more than $80 million – a premium of more than 40% over the concurrent stock price. PlayCore was advised by Donaldson Lufkin & Jenrette. Avado Brands Inc., a restaurant chains operator based in Madison, Ga., decided after a lengthy review to remain a publicly traded company.