Video for Sale

Viacom Corp. (New York) said it is nearing a decision to spin off its Dallas-based Blockbuster video-rental business.

The decision comes after Viacom explored selling Blockbuster last year amid increasing competition in the home video market from the likes of Wal-Mart and Netflix, as well as the threat that video-on-demand offerings by cable operators could make renting a physical DVD or VHS tape obsolete.

Without a buyer, a spinoff is considered the most likely outcome. According to a report in The New York Times, analysts the transaction to involve an exchange of stock between shareholders of Viacom and shareholders of the 18 percent of Blockbuster already owned by the public. Analysts say it would not be feasible for Viacom to sell its 82 percent stake to the public as newly issued Blockbuster shares because there probably wouldn't be much demand for the stock.

In the last two months, Viacom has held many discussions with several private equity firms, all of which have collapsed, primarily because Viacom hasn't been willing to lower its price. Based on the current price of Blockbuster shares, Viacom's stake could be expected to fetch $2.8 billion. Blockbuster stock went public at $15 a share in August 1999 and traded as high as $30 a share in May 2000, but has since fallen to less than $20 a share. Although Viacom originally planned to sell the rest of Blockbuster to the public soon after the 1999 stock offering, the company decided to retain its stake because of the business's steady cash flow (and also because Viacom became distracted by its 2001 integration of CBS).

Through aggressive cost cutting, particularly in expenses for marketing, Blockbuster has continued to perform well financially. Year-end results have not yet been released, but in the first nine months of 2003 Blockbuster generated 22.5 percent of Viacom's $19.1 billion in revenue and 12 percent of its $4.4 billion in cash flow. But the growth of Blockbuster's revenue was only 8 percent. And with most of the cost cuts already made, and the continued fixed costs of the stores, analysts say, Blockbuster will not be able to achieve even that growth level this year.