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Investors Cool on Blockbuster Plan

Some say stock in the chain is not attractive even if Viacom's spinoff offers a discount. Others worry a dividend could create too much debt.

June 12, 2004|From Bloomberg News

Viacom Inc. Chief Executive Sumner Redstone's plan to split off the company's 82% stake in Blockbuster Inc., the world's largest video-store chain, is getting a cool reception from some shareholders.

Viacom, which announced the proposal in February after failing to find a buyer, expects to give Viacom investors the option of exchanging their shares for new stock in Blockbuster, which also may pay a special dividend to shareholders. The transaction may be completed as early as July, Redstone, 81, said last week during an analyst conference in New York.

Blockbuster will probably borrow $1 billion to finance a $6-a-share dividend going mostly to Viacom, said analyst Stacey Widlitz of Fulcrum Global Partners. Redstone would be saddling Blockbuster with debt as it loses customers to discounters including Wal-Mart Stores Inc., mail-order services such as Netflix Inc. and video on demand offered on cable television.

"We wouldn't take the Blockbuster shares," said Wayne Wilbanks, chief investment officer of Norfolk, Va.-based Wilbanks, Smith & Thomas Asset Management, which owns 216,000 shares of Viacom. "Blockbuster is a dying business."

Blockbuster, which Viacom bought in 1994 for $6.7 billion, operates about 8,900 stores worldwide. Dallas-based Blockbuster has lost about $3.6 billion since 1997, including costs of $1.3 billion in the fourth quarter to write down the value of assets ahead of the split.

Susan Duffy, a spokeswoman for Viacom, the third-largest U.S. media company, declined to comment on the terms of the agreement.

Analysts expect the company to offer Blockbuster shares at a discount to make the exchange proposal more attractive. That may not be enough to entice investors such as Richard Steinberg, who values Viacom shares because Viacom's CBS unit is the most-watched television network and profit surged 24% last quarter at its cable-based MTV networks.

"We're not going to trade it," said Steinberg, president of Steinberg Global Asset Management in Boca Raton, Fla., which owns 60,000 shares of Viacom. A discount "isn't a big enough hook."

Blockbuster shares are little changed since the company first sold stock to the public at $15 each in August 1999. They fell 4 cents to $15.49 on Thursday on the New York Stock Exchange.

Viacom fared worse, with the company's shares dropping about 4.2% in the five years ended in May. Viacom Class B shares rose 55 cents to $37.97 on Thursday, also on the NYSE.

Blockbuster and Viacom B shares are down 14% each this year.

Viacom wants the dividend to get as much cash from the video-rental chain as possible, said Fulcrum analyst Rich Greenfield, who has a "buy" rating on Viacom. "They want to harvest cash out of it," he said.

Investors who will probably exchange Viacom for Blockbuster shares include arbitragers looking to make a quick profit from the difference between the price of the existing shares and any discount, said Harold Vogel, a media analyst and head of Vogel Capital in New York.

The plan was touted at last month's annual meeting by Redstone as an "enormous stock buyback" for shareholders because it would probably retire millions of Viacom shares.

Redstone controls 71% of the voting shares for New York-based Viacom through his stake in National Amusements Inc., a closely held theater chain. He expanded that control last week when Viacom President Mel Karmazin, 60, resigned after four years of tension with Redstone over who made the daily decisions on how to run Viacom.

The exchange will still dilute Viacom shareholders' stakes because the company will lose Blockbuster's profit and sales, said Peter Mirsky, an analyst at Oppenheimer & Co. in New York.

Blockbuster is forecast to earn $246 million on $6 billion in sales this year, according to the average estimate of 10 analysts surveyed by Thomson First Call. That's 8% of Viacom's estimated 2004 profit and 21% of revenue.

If Blockbuster uses debt to finance a special dividend, it won't hinder the company's ability to run its business, spokesman Randy Hargrove said.

"Our goal is to make sure our capital structure is adequate to allow Blockbuster to further its strategy," he said.

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