Spelling to Buy a 75% Stake in Virgin Interactive

Don’t give up on multimedia yet. An interactive “Melrose Place” may soon be on the way.

Spelling Entertainment Group Inc., the Los Angeles-based producer of TV shows such as “Melrose,” “Beverly Hills, 90210,” and “Dynasty,” said Wednesday that it plans to buy a controlling interest in Irvine-based Virgin Interactive Entertainment for about $165 million.

The deal is the latest example of the accelerating consolidation of the video game industry and the mainstream entertainment business. Virgin, which has been a leader in the development of sophisticated video games based on CD-ROMs, could enable Spelling to reap new revenue from past and future TV programs.

The transaction also reflects the continuing diversification strategy of video rental giant Blockbuster Entertainment Corp., which owns 70.5% of Spelling.

Under terms of the agreement, Blockbuster will exercise its option to buy 55% of Virgin Interactive from British entrepreneur Richard Branson’s family trusts, raising its interest in the firm to 75%. Spelling will then buy Blockbuster’s entire stake for common stock worth about $165 million. Toy maker Hasbro Inc. will retain its 15% stake in the firm, and Branson’s trust will keep 10%.

A number of entertainment firms, including PolyGram Holdings Inc. and most of the major Hollywood studios, were said to have been interested in Virgin. An acquisition had been expected since Virgin canceled its proposed initial public offering in March.

Virgin Chief Executive Martin Alper said Spelling’s status as an independent production company was crucial.

“By allying ourselves with Spelling, we don’t alienate any of the studios,” Alper said. “That was very important in making the decision.”

Virgin, with expected revenue of about $200 million this year, is among the five largest U.S.-based video game companies. It has worked with Walt Disney Co. on the “Aladdin” and “The Lion King” video games and with Warner Bros. on the interactive version of “Demolition Man,” due out this fall.

Film studios and publishing companies, fearful of missing the next big wave in entertainment, have been racing to invest in multimedia software companies. Just this month, producer-director Steven Spielberg invested in La Crescenta-based software developer Knowledge Adventure, whose other investors include Viacom Inc. and AT&T.; Earlier this year, MCA/Universal invested in Irvine-based Interplay, and Pearson bought Novato-based Software Toolworks.

And although a new crop of multimedia start-ups have attracted billions from venture capitalists and other investors recently, the list of successful independent interactive software firms is growing short.

“There are very few companies which have made a major success in this business,” said Lee Isgur, an analyst at Jefferies & Co. in San Francisco. “If you don’t get control of one of them early on, you run the risk of getting frozen out.”

The acquisition craze has led to some jumbling of traditional business boundaries. Disney and Sony Corp., competitors in the movie business, are collaborating on a Mickey Mouse CD-ROM game, for example. And Blockbuster’s ownership of Virgin could give Virgin problems with other video game retailers such as Toys R Us and Wal-Mart.

But Ron Castell, Blockbuster senior vice president for programming and communications, said Blockbuster stores would not get preferential treatment with Virgin’s hit games. “The only reason Virgin will grow is if they’re able to sell en masse,” Castell said. “The playing field will remain level.”

Some entertainment executives say the cost of acquiring interactive software firms has been driven too high by the hype. But Spelling Chief Financial Officer Thomas Carson says he believes the potential for exploiting existing Spelling assets in a new medium will justify the purchase price.

“We hope to make computer games from our television programs, and our licensing and merchandising division may be able to find opportunities with the popular computer games,” Carson said. “We will review all of our current programming and then start looking back through our library.”

One possible cloud in this synergy paradise: Many of Spelling’s most successful shows have had strong female audiences, but video and computer game consumers are nearly all male.

Still, Virgin, as well as other game makers, is looking to develop products that will interest the other half of the population. Virgin’s Alper also emphasized that the two companies will develop new properties together. Games, he hopes, will be turned into TV shows, as well as vice versa.

On a recent trip to Virgin’s headquarters, Carson said, he was struck by the similarities between interactive production and traditional “linear” production. “They were all there pitching their stories, doing character development, filling in the artwork,” he said. “But it’s also a whole different world. I’m in my mid-40s and I have my own laptop computer, but I felt like an old-timer down there.”

In New York Stock Exchange trading Wednesday, Blockbuster shares gained 12.5 cents to close at $26.50; Spelling rose 37.5 cents to $8.875.