By RUKMINI CALLIMACHI, AP

PORTLAND, Oregon (Feb. 12) - Blockbuster Inc. has begun a hostile takeover of its smaller rival, Hollywood Entertainment Corp.

Dallas-based Blockbuster officials said Friday the company had approached Hollywood`s creditors to buy around $225 million (euro175 million) of the video retailer`s debt, roughly two-thirds of the Oregon company`s overall debt.

The offer sets in motion Blockbuster`s plan announced one week ago to offer $985 million (euro766 million) in cash and stock for No. 2 Hollywood, which has already agreed to a $900 million (euro700 million) offer from the nation`s third-largest video chain, Alabama-based Movie Gallery Inc.

Blockbuster`s bid equals $14.50 (euro11.28) per share in cash and stock, compared to Movie Gallery`s offer of $13.25 (euro10.30) per share in cash only.

Both suitors had promised to assume the $350 million (euro272 million) in Hollywood debt, but Hollywood has rejected Blockbuster`s advances over the past several months.

``When you buy a company, you also assume all its debt and liabilities - Blockbuster is saying `We`re ready to start buying your debt,``` said analyst Arvind Bhatia, senior vice president and director of research at Southwest Securities Inc. in Dallas. ``It`s just step No. 2 in what Blockbuster already announced they would do.``

Shareholders have until March 11 to decide whether to sell their shares to Blockbuster, the nation`s largest video retailer with roughly 9,000 stores worldwide.

If Hollywood and Movie Gallery were to merge, it would create a combined video chain with about 4,500 stores - still only half the size of the far larger Blockbuster.

In their pitch to Hollywood shareholders, Movie Gallery officials have consistently stressed that the Blockbuster bid will most likely be struck down by regulators. In 1999, the Federal Trade Commission derailed Blockbuster`s plan to swallow Hollywood, after the deal was deemed anticompetitive.

Blockbuster officials counter that the market is no longer just video retailers, but also big box chains which sell videos and DVDs, such as Wal-Mart, and mail-order retailers like Netflix. If the market is expanded to include those players, the combined No. 1 and No. 2 video rental chains is no longer a regulatory threat, officials of the nation`s leading chain said.

Daniel Burch, a Hollywood spokesman, declined to comment, saying the company intends to respond by Feb. 17, or 10 business days after Blockbuster`s initial offer as required by federal securities law. Officials at Movie Gallery did not immediately return calls.

02-12-05 16:59 EST