Viacom Inc. gave its shareholders a generous financial incentive Wednesday to buy out its stake in Blockbuster Inc. -- the latest sign of the flagging health of the video rental business.
Viacom, which acquired Blockbuster in 1994 for $6.7 billion, said it would give shareholders a premium of as much as 19% for trading in Viacom shares for those of the video retailer.
The entertainment giant could lose up to $1.2 billion on the deal, depending on the number of shares exchanged, the company said Wednesday in a regulatory filing. That's because of the difference between the value of the Viacom shares tendered and those of the Blockbuster stock they would be getting.
In addition to owning CBS, MTV, Nickelodeon and Paramount Pictures, Viacom owns 81.5% of Blockbuster and plans to dispose of its entire stake in the exchange offer.
Viacom disclosed plans to "split off" the video retail chain to its shareholders in February, after failed attempts to find a corporate buyer. At the time, Viacom took a $1.3-billion charge against its earnings because of the declining value of Blockbuster, which operates nearly 9,000 stores.
As a result of the chain's uncertain future, analysts had expected Viacom to be forced to offer shareholders a sweetener to participate in the split off.
Blockbuster has seen sales decline as a result of intensifying competition from discounters such as Wal-Mart Stores Inc. and Web-based services including Netflix Inc.
Under the terms of the exchange offer, which will expire Oct. 5, Viacom shareholders can exchange each of its Class A and Class B shares for 5.15 Blockbuster common shares.
Based on Blockbuster's $7.90 closing price Tuesday, Viacom shares are valued in the offer at $40.69 -- a 17.6% premium over Viacom Class A shares' Tuesday closing price and a 19.2% premium over Viacom Class B shares' Tuesday closing price.
Investors on Wednesday signaled that the deal favored Viacom. The company's shares closed Wednesday at $35.08, up 48 cents on the New York Stock Exchange. Blockbuster shares dropped 42 cents, to $7.48.
To keep the effects of the Blockbuster separation from diluting Viacom's earnings, Viacom Chief Executive Sumner Redstone said he planned a huge buyback of additional outstanding Viacom shares after the exchange offer is completed. Viacom isn't allowed to buy back shares of its stock while the offer is pending, Redstone has said.
Viacom will finance the buyback in part using $782 million in proceeds it reaped when Blockbuster paid its shareholders a $5 dividend in August. In all, Viacom could spend as much as $8 billion to buy back its shares, according to analysts.