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Dolphin-I Cautions Hollywood Special Committee That Auction
Process Must be Disinterested
STAMFORD, Conn., Nov. 22 /PR Newswire/ -- Dolphin Limited Partnership I, L.P.,
a Stamford, CT based private investment partnership that beneficially holds 1.9
million shares of Hollywood Entertainment, Inc. (NASDAQ:HLYW), today released
the following open letter to the chairman of the special committee of the
Company's board of directors that is conducting the process for the sale of the
Company. In the letter, Dolphin explains why it believes the actions of the
committee to date have been suspect and cautions that the committee must now
conduct an auction process that is totally fair and disinterested.
November 22, 2004
Mr. S. Douglas Glendenning
Chairman, Special Committee,
Board of Directors
Hollywood Entertainment, Inc.
9275 S.W. Peyton Lane
Wilsonville, OR 97070
Dear Mr. Glendenning:
With Friday's announcement by Movie Gallery, Inc. that it too has delivered an
acquisition proposal to your committee, there are now two bids competing with
the undervalued buyout by Leonard Green & Partners ("LGP") and top management.
We may never know the damage shareholders have suffered because the committee
entered into an exclusive arrangement with LGP and the Company's chairman, Mr.
Mark Wattles, earlier this year rather than having conducted an auction. The
pretext given for initially not seeking an auction -- that it would somehow
damage the Company by leading to "leaks" -- now appears to have evaporated.
With each new bona fide bid for the Company, suspicions grow that the
committee's decision to deal exclusively with LGP and Mr. Wattles was not made
in the best interests of shareholders.
We caution the committee that consideration of all acquisition proposals must
be conducted in a fair and evenhanded manner, with no advantage whatsoever
given to the transaction sponsored by LGP and top management. This includes
providing ample time for all bidders to conduct diligence, as LGP has had over
nine months to examine the Company. Now the objective of the committee must be
to obtain the best and highest possible transaction value for all shareholders.
Thus far, we believe the committee has failed to demonstrate its allegiance to
all of its shareholders. We say this because of the initially flawed process
by which the committee approved the March LGP buyout and the serious questions
that arise from the revised proxy materials in support of the reduced October
buyout. The committee appears to have accepted the revised fairness report
which, even upon a casual comparison to the July $14/share transaction, reveals
obvious flaws. Nearly every aspect of the October analysis-an over reliance on
top management's dramatically cut projections, the utilization of unsupported
reduced terminal exit multiples, the introduction of factors to discount the
market value of the Company's shares to its comparable competitors and the
absence of a control premium analysis-appears to have been adapted to support a
27% cut to $10.25.
How could the committee also fail to appreciate what the Company's competitors
were saying about the depressed second-half industry results? During this
timeframe there has been a "perfect storm" - the Olympics; the presidential
election; the highly competitive fall baseball season; the private release of
the Passion and Fahrenheit 9/11 that drew large audiences but whose store
appearance has been delayed; the extreme weather in the Southeast; and the
generally weak movie release calendar. The unbelievable $67 million drop in
top management's 2005 EBITDA projections -- that occurred in a span of just
three months -- appears predicated on these anomalies. Yet there is no
evidence in the revised proxy materials that the committee was properly focused
on the confluence of these likely one-time circumstances, let alone applied
them to a critical analysis of top management's revised projections.
With this background, we are carefully watching the committee for any hint that
the auction process is not being conducted in a thoroughly disinterested
manner. Only a process that yields the highest and best value for all
shareholders, a solid merger agreement -- as opposed to the two Swiss cheese
agreements in the LGP/top management buyouts -- and appropriate and timely
information to all shareholders will demonstrate that the committee has indeed
lived up to its fiduciary responsibilities. Despite the questionable history
of this transaction, we expect that you and your colleagues on the committee
will now do so.
Very truly yours,
/s/ Donald T. Netter
Donald T. Netter
Senior Managing Director
cc: J. Feuer, Esq. (Gibson Dunn & Crutcher, Counsel to the Special
Committee)
J. K. Layne, Esq. (Gibson Dunn & Crutcher, Counsel to the Special
Committee)
R.J. Moorman, Esq. (Stoel Rives LLP, Counsel to the Company)
DATASOURCE: Dolphin Limited Partnership I, L.P.
CONTACT: L. Bolster of Dolphin Limited Partnership I, L.P.,
+1-203-358-8000