BLOCKBUSTER, the world’s largest film rental chain, yesterday revealed that it had approached its smaller US rival Hollywood Entertainment with a takeover offer worth $1 billion (£541 million) in an attempt to fend off upstart internet-based competitors.

The company, which was last month spun out of Viacom, the films to billboards conglomerate, said that it had “expressed an interest” in buying Hollywood for $11.50 per share, or about $700 million, plus the assumption of about $350 million of debt.

Blockbuster has about 9,000 stores worldwide 700 of them in the UK while Hollywood Entertainment boasts almost 2,000 Hollywood Video stores and 600 Game Crazy speciality stores, mostly in the US. Both are under siege from rivals offering films that are either ordered over the internet and delivered by post or delivered on demand to the home through high-speed broadband and cable connections.

Blockbuster has created a service that allows customers to order DVDs through a website and keep as many as three at a time without deadlines to return them. The service was set up to head off Netflix, which provides a similar function for more than 2.2 million Americans. Amazon.com, the world’s largest online retailer, is also looking at the costs of setting up a similar service.

Blockbuster recently reported a third-quarter loss of $1.4 billion because of writedowns of some assets and the cost of setting up its internet service. Analysts believe that its traditional store-based business needs to acquire other players to remain viable as the entire market shrinks.

“This is the typical endgame of an industry that is in decline,” Dennis McAlpine, an independent media analyst in New York, said. He added that eliminating Hollywood as a rival would reduce the necessity for Blockbuster to discount heavily in areas where the two at present compete.

But other observers doubted the long-term value of either company. “To me, this is a bad business buying a bad business,” Stacey Widlitz, an analyst at Fulcrum Global Partners, said.

Blockbuster said that while it has told Hollywood Entertainment that it would be interested in making a deal, the two have not discussed terms in detail.

John Antioco, Blockbuster’s chairman and chief executive, said: “We believe this proposed transaction better positions Blockbuster to compete in the rapidly changing home entertainment marketplace, while simultaneously benefiting consumers as well as Blockbuster and Hollywood Entertainment shareholders.”

The bid from Blockbuster is 12 per cent higher than an offer for Hollywood recently made by Leonard Green & Partners, a leveraged buyout firm, which later said that it was unable to find financial backers.

Blockbuster, based in Dallas, Texas, and Hollywood, of Wilsonville, Oregon, tried to sign a franchising alliance five years ago but was warned off by competition regulators. If successful with the takeover, Blockbuster would be expected to point to the emergence of online rental firms such as Netflix and the growing retail DVD market as evidence that the competitive environment has changed. DVDs are now Hollywood’s biggest money-spinner.

Ms Widlitz said that the outcome of any acquisition would depend on how the US Federal Communications Commission defines the home entertainment market.