Blockbuster is taking aggressive action to improve its chances in the hard-hit video rentals market with a $1bn bid including debt for Hollywood Entertainment, its next-biggest competitor.

The offer to acquire Hollywood Entertainment for $11.5 per share in cash - totalling about $700m - is the first strategic move by John Antioco, Blockbuster's chief executive, since the video retailer was spun off from entertainment giant Viacom last month. The initial market reaction was positive, with shares in both Blockbuster and Hollywood Entertainment rising.