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Blockbuster may stay put
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October 20, 1999: 4:44 p.m. ET
CBS/Viacom may keep video rental chain as stock sputters and earnings don't
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NEW YORK (CNNfn) - CBS Corp. officials are mulling the possibility of retaining Viacom Inc.'s stake in video-rental chain Blockbuster Inc. because of recent weakness in the company's stock, sources confirmed Wednesday.
CBS Chief Executive Officer Mel Karmazin has asked several institutional investors for their thoughts on canceling a planned Blockbuster spin-off once CBS and Viacom complete their planned $35 billion merger, according to the Wall Street Journal, which first reported the company's second thoughts Wednesday.
CBS officials familiar with Karmazin's thinking said the market-savvy CEO, who will assume day-to-day control of the CBS/Viacom entity once the merger is finalized, believes Blockbuster (BBI) is so undervalued right now, it could be worth more under the Viacom umbrella.
"It makes a lot of sense," one official told CNNfn. "Blockbuster is a tremendous brand name and Mel thinks it's undervalued right now."
CBS and Viacom officials both declined comment, but analysts clearly agree.
Blockbuster's stock has wallowed in the $12 to $15 range since Viacom sold roughly 18 percent of the company to the public at $15 per share in August.
"I'm sure there's some frustration there," said L. Keith Mullins, an analyst with Salomon Smith Barney who currently has a "buy" rating on Blockbuster's stock. "So as long as Blockbuster is able to see shareholder value enhanced by sticking with [Viacom and CBS], I'd like to see them all stick together."
Earnings up, stock down
Mullins noted that despite posting solid third-quarter earnings ahead of analysts' expectations Wednesday, the company's stock continued to suffer. Blockbuster finished the day down 1-1/16 to 13-9/16.
This despite posting cash profits of $22 million, or 14 cents per share, before goodwill amortization for the three months ended Sept. 30, 1999.
That compared to cash earnings of $19.6 million, or 14 cents per share, a year earlier and beat the consensus analyst estimate compiled by First Call Corp. by a penny.
Including goodwill, Blockbuster actually posted quarterly net income of $19.1 million, or 12 cents per share, up slightly from the $21.5 million, or 15 cents per share it lost a year earlier.
Revenues for the quarter rose 13 percent to $1.1 billion million, compared to sales of $985.4 million during the comparable quarter last year.
For the year so far, Blockbuster has cash earnings of $60.8 million, compared to a loss of $200.6 million last year.
That kind of cash flow would seemingly play into Karmazin's hands once the company's are merged.
Viacom's Redstone on board?
Sumner Redstone, Viacom's (VIA) chairman and majority shareholder, is also dismayed by Blockbuster's current market valuation, according to people familiar with his thinking.
Redstone's support for any such plan to retain Blockbuster would be critical as he is slated to remain CEO of the merged CBS/Viacom.
Viacom has never officially laid out a timetable for the possible spin-off but analysts had expected it sometime next year. In a prospectus filed when the company went public, Viacom indicated it "currently intends" to spin off the remaining 82 percent stake in Blockbuster it currently holds.
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