Virgin Interactive Entertainment PLC, Orange County's largest publisher of video and computer games, said Wednesday it will put 16% of its shares up for sale in an initial public offering.
Virgin in Irvine will become Orange County's only public game publisher in an industry that many analysts believe will introduce the so-called "interactive entertainment" of the future, including games that provide stunning motion-picture quality video, stereo sound and computer animation.
The company is owned by Richard Branson, founder of England's Virgin Group, the airline and record store empire. Blockbuster Entertainment Video, the giant video rental company, and Hasbro Inc., the world's largest toy maker, paid a total of $55 million for minority stakes in the company during the past year.
Blockbuster's $30-million purchase of a 19.9% stake in Virgin last month suggests Virgin's total value is $150.7 million. Based on that valuation, the company could raise $24 million at $13 a share in the offering. An actual price has not been set.
The company said it will use the funds generated from its offering for working capital, product development and general corporate uses.
Branson, whose holdings include Virgin Atlantic Airways and Virgin Megastores, would remain the video game publisher's largest shareholder.
In the offering, Branson and his family trust would sell 850,000 shares of the company's current 9.8 million shares. The company also would issue about 1 million shares of new stock, bringing the total shares outstanding to about 11 million. As a result, Branson's stake would slip from 61.7% before the sale to 46.8%.
Branson's London-based Virgin Group started its own video game unit in 1983 and in 1987 it acquired a video game company in Irvine run by British transplant Martin Alper, the current president of Virgin Interactive. The company changed its name from Virgin Games to Virgin Interactive Entertainment last year to reflect its push into broader fields of entertainment.
"They are one of the best-positioned publishers in the market today," said John Taylor, an analyst at L.H. Alton & Co., an investment bank in San Francisco. "They have good titles, good in-house development, worldwide sales distribution and are up to their elbows in connections to Hollywood."
Richard Devereux, chairman of Virgin Interactive, said the Branson family was selling its stock to fulfill a promise it made when the Virgin Group went private in 1989. The company said at the time it would return to the public market with a highly visible business, he said.
"This will also raise a lot of money, and that is good to have in this fast-moving, ever-changing industry where opportunities arise every day," Devereux said. "It's useful to have a war chest."
Aside from Nintendo and Sega, which are privately held, Virgin competes against larger independent video game companies such as Electronic Arts Inc. in San Mateo, Acclaim Entertainment Inc. in Oyster Bay, N.Y., and Japanese-owned Capcom in Sunnyvale.
Virgin has operations in Irvine, London, Paris, Las Vegas, Tokyo and Hamburg, Germany. The company has 300 employees, many of whom develop games in Irvine and Las Vegas. But it also hires other companies to develop titles published under Virgin's name. During the last fiscal year, it released 31 titles for the Nintendo and Sega systems and for personal computers.
The company's more popular titles include "The 7th Guest," a mystery set in a haunted mansion that has become the most popular game on computer compact disk with sales expected to hit 500,000 copies by spring; "Dune," "Monopoly Deluxe," "Cool Spot," "Terminator" and "Robocop vs. Terminator." Virgin worked with Walt Disney Co. to develop a game based on the animated feature film "Aladdin" and will do so again with Disney's upcoming feature, "The Lion King."
Devereux said the company is investing heavily in developing games for the CD-ROM, or compact disk, read-only memory, a software format similar to the music CD that allows the combined use of text, video, graphics and sound. Taylor said CD-ROMs are the fastest-growing format in the industry.
"We are a believer in the interactive future, although we will sell our products on whatever technology becomes the dominant format," Devereux said.
A filing with the Securities and Exchange Commission this week reveals Virgin Interactive's financial performance for the first time. Virgin reported a loss of $4 million on sales of $99 million for the fiscal year ended July 31, 1993, compared with a loss of $1.5 million on sales of $50.2 million in the previous fiscal year.
However, the loss includes a one-time expense of $6.4 million to convert the compensation of two top executives, Alper and Tim Chaney, to stock options. Not counting the expense, the company reported a profit of $4.3 million for the year, Devereux said.
The losses in past years were prompted by huge investments--about $9 million a year--in the next generation of video games. The company's headquarters were recently expanded to include 17 game production studios where teams of eclectic video game creators labor on expensive Silicon Graphics "graphics supercomputers" to build increasingly complicated games.
The company reported a profit of $1.1 million on sales of $22 million for its first fiscal quarter ended Oct. 31, compared with a loss of $2.7 million on sales of $12.5 million in the similar period a year earlier.
Blockbuster will own 17.7% of the stock after the sale, compared with 19.9% before the sale. Hasbro's ownership will decrease from 16.2% before the sale to 16% afterward. Both companies have options to sell some stock as a part of this offering.
The offering will be underwritten by CS First Boston in New York and Piper Jaffray Inc. in Minneapolis, according to the filing this week with the Securities and Exchange Commission. The company shares will be traded on Nasdaq.