The deal will give Movie Gallery about 2,000 Hollywood Video stores, bringing its total to 4,500 units in North America. Company officials expect to close the deal in this year's second quarter.

The transaction tops frontrunner Blockbuster Inc.'s offer to acquire Hollywood for $11.50 per share, as well as private equity firm Leonard Green & Partners' $10.25 proposal, to which Portland, OR-based Hollywood had previously agreed.

"This transformational merger creates a leading North American rentailer with outstanding prospects for future growth," said Joe Malugen, Movie Gallery's Chairman, President and CEO, in a statement. "With a broader geographic presence and greatly improved distribution capabilities and scale, our combined company will be a strong competitor, well-positioned for continued success in urban, suburban and rural markets."'