Reel.com goes Hollywood

Hollywood Entertainment, which runs the video-rental chain Hollywood Video, said today it has agreed to buy Reel.com, the Internet video store, in a deal valued at $100 million.

The deal is another example of a brick-and-mortar business expanding its reach on the Net. The trend includes booksellers such as Barnes and Noble, computer software makers such as Egghead, and office product suppliers such as Office Depot.

Hollywood Entertainment closed up more than 10 percent at 17.6875.

"This acquisition allows us to leverage Hollywood's base of 25 million members, industry knowledge, and studio relationships to a new and rapidly growing distribution channel," Hollywood Entertainment chief executive Mark Wattles said in a statement. "This transaction ideally positions us to be a leader in electronic commerce as well as the future of electronic distribution of movies."

The deal calls for Hollywood Entertainment to issue five million shares of restricted stock and preferred stock, as well as $30 million in cash, to stockholders of Reel.com. The deal is expected to close within 30 days. Reel.com will continue to operate under its own independent management and chief executive Julie Wainwright.

"It positions the company for the future," Wainwright said. "It will make it hard for anyone to compete with us."

The deal has been negotiated for the past three weeks, she said. Reel.com's lone retail store will remain open.

Wainwright said also that Reel.com has considered going public and already has spoken to investment bankers about its prospects for doing so. As for selling the company, she observed: "The purchase price is a healthy price."

In a separate deal, a group of Reel.com's stockholders will buy an additional five million shares of restricted Hollywood Entertainment common stock at a price of $13.50 per share, a discount from the public market price. The shares, together with those issued in the acquisition, will not be transferable for one year after closing.

The investor group includes CMG Information Services, Intel, Paul Allen's Vulcan Ventures, and Scott Beck, former chief executive officer of Boston Market and former vice chairman of Blockbuster Entertainment.

"This, in turn, can help to bring new users--and new users--to PCs and the Internet," said Avram Miller, Intel's corporate vice president of business development.

(Intel is an investor in CNET: The Computer Network.)