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Blockbuster IPO mulled
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July 22, 1998: 7:06 p.m. ET
Viacom confirms potential IPO of Blockbuster unit, sees $437M charge
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NEW YORK (CNNfn) - Viacom Inc. may sell a portion of its Blockbuster Entertainment subsidiary to the public within the next 14 months, top officials confirmed Wednesday.
Separately, the Manhattan-based media conglomerate said the video rental unit will take a $437-million charge in the second quarter to reflect changes in the way the company accounts for video rental transactions.
In a presentation to Wall Street analysts Wednesday, Viacom Chairman Sumner Redstone said he is considering a number of options for Blockbuster including an initial public offering or a spin-off to shareholders.
The remarks represented the strongest indications to date that Viacom will heed investors' concerns regarding the once-troubled unit, which was purchased as part of its 1994 acquisition of Paramount Studios.
"We understand that the real market value of Blockbuster may never be fully realized as a wholly owned part of Viacom," Redstone said through a spokesman.
"Some have suggested that we spin off Blockbuster, which as many of you know becomes an option beginning in the fourth quarter of 1999. Others have suggested the notion of an initial public offering carve-out prior to the spin-off."
"With respect to the future, what I can tell you now is we are aware of and considering these and all of our options," Redstone said.
Due to tax implications, Viacom is restricted from selling Blockbuster before September 1999 -- the fifth anniversary of the closing of the acquisition.
But Viacom's investors have suggested that as much as 10 percent of Blockbuster could be carved out through an IPO prior to September 1999.
"It's a very smart move particularly if you buy into the premise that it's actually fixed," said Stuart Rossmiller, analyst at Deutsche Bank Securities.
Meanwhile Redstone -- who has repeatedly stated in the past that Blockbuster is "fixed" - told analysts Viacom will record the $437 million charge as a one-time, non-cash item in the second quarter of 1998.
The charge relates to its innovative "revenue-sharing" program, under which Blockbuster obtains video releases with the financial help of the major Hollywood studios rather than outright purchasing the tapes. The program has allowed the chain to stock more copies of new releases in its stores and has widely been attributed for much of the turnaround.
"The consumer has responded by renting more and renting more often," said Blockbuster Chairman John Antioco, who also participated on the conference call.
But because Blockbuster now expects to purchase about 90 percent of its rental units under the revenue-sharing program in the second half of 1998, Viacom needs to take the charge to revise its accounting.
Previously, Blockbuster purchased tapes for a fixed price, which was amortized over a period of six to 36 months. Under the new method, the nominal up-front amount Blockbuster now pays to the studios will be amortized on an accelerated basis over three months. Hollywood studios' share of revenue will be expensed by Blockbuster as revenue is recognized.
Yet while the accounting adjustment will result in lower second-quarter profits, Viacom added the Blockbuster is making gains in membership and frequency of visits. The increased volume is resulting in higher numbers of rentals and revenue.
Improvements at Blockbuster has led to a nearly 13.3 percent increase in worldwide same-store rental revenues in the second quarter ended June 30, versus a 3-percent decline in the same year-earlier period.
In addition, Blockbuster said domestic same-store rental transactions rose 16 percent in the 1998 second quarter. The company also reported that same-store active memberships increased 7 percent.
-- by staff writer Robert Liu
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