NEW YORK -- Video rental chain Hollywood Entertainment Corp. has agreed to a buyout offer of about $850 million from rival Movie Gallery in a deal that would create a stronger challenger to industry leader Blockbuster.
But in a sign that Wall Street is betting the fight for Hollywood Entertainment may not be over, investors pushed its shares well above the offered price in early trading.
The planned combination announced Monday of the No. 2 and No. 3 video rental chains would create a company with annual revenue of $2.5 billion and about 4,500 stores.
That would still be a distant second to Blockbuster, which has 9,000 outlets worldwide.
Hollywood Entertainment, based in Wilsonville, Ore., has been looking for a buyer for several months and had attracted bids from both Movie Gallery and Blockbuster.
Blockbuster had said last month it would launch a hostile bid for Hollywood Entertainment in January if the rival's directors won't negotiate a deal.
On Monday, Blockbuster spokesman Randy Hargrove declined to comment on the announced deal.
The agreement comes as traditional video rental companies are locked in a price war with online pioneer Netflix Inc. and Wal-Mart for rentals ordered on the Internet and delivered by mail.
Under the deal announced Monday, Movie Gallery would offer $13.25 a share, or about $850 million, in cash for Hollywood Entertainment's shares. It would also assume about $350 million in Hollywood's debt.
The offer represents a slim 1.5 percent premium over Hollywood Entertainment's closing price of $13.05 on Friday on the Nasdaq Stock Market.
In a sign that some investors expect a higher bid, Hollywood Entertainment shares climbed 56 cents, or 4.3 percent, to $13.61 in early trading in Nasdaq. Movie Gallery shares were up 30 cents at $19.37.
Dallas-based Blockbuster offered $11.50 a share for Hollywood in November. Early in December, it had said it may sweeten its offer for its rival.
Hollywood Video has 2,000 Hollywood Video stores and more than 700 Game Crazy specialty stores. Movie Gallery has more than 2,000 outlets.
Joe Malugen, Movie Gallery's chairman, president and CEO, said in a statement that the deal would create a stronger competitor with "a broader geographic presence and greatly improved distribution capabilities."