Blockbuster and Viacom May Be Wed After All : Mergers: Blockbuster’s board backs the deal, which could again fall through if Viacom’s stock price drops.

Directors of Blockbuster Entertainment Corp. voted unanimously Tuesday to recommend a once-doubtful merger with Viacom Inc., setting a Sept. 29 date for a shareholders meeting to vote on the deal.

The outcome could still be a cliffhanger, however, if Viacom’s stock price drops as it did in the months following the Jan. 7 merger agreement struck by the two companies. But with 22% of Blockbuster’s stock pledged by the company’s founders and certain key executives, approval by a majority of Blockbuster shareholders appears likely, several sources said.

The merger would create an entertainment giant with operations spanning film and TV production, video rentals and sales, broadcasting, cable, syndication, publishing, sports and new media.

Blockbuster shares rose 62.5 cents to $27.875 on the New York Stock Exchange before the announcement. Viacom Class B shares closed at $35.25, down 25 cents.

It was the Blockbuster merger agreement that gave Viacom a $1.25-billion cash infusion and enabled it to win a costly bidding contest in February for Paramount Communications Inc. But afterward, the price of Viacom stock tumbled to the low 20s. In early May, Blockbuster Chairman H. Wayne Huizenga warned shareholders that the board might be unable to recommend the deal, even though he personally was obligated to vote his shares in favor of the merger.

Most pundits declared the Viacom-Blockbuster merger all but dead, but the deal had a “drop dead” date of Sept. 30, and a “wait-and-see” attitude developed. Viacom’s stock began to recover as the company announced certain asset sales and released two of the summer’s biggest box office hits with Paramount’s “Forrest Gump” and “Clear and Present Danger.”

Meanwhile, sources said Viacom is likely to declare a winner this week in the auction of its Madison Square Garden asset acquired in the Paramount takeover. A joint venture formed by Cablevision Systems Corp. and ITT Corp. is believed to have made the high bid at nearly $1 billion, but negotiations have continued with rival bidder Tele-Communications Inc. TCI has also proposed the acquisition--through an affiliate--of Viacom’s cable TV systems and the merger of two pay cable services, sources said.

Some industry sources have speculated that Viacom Chairman Sumner Redstone would be just as happy not to complete the Blockbuster merger, because it would require issuing more Viacom shares and reducing his own equity from 46% to 24% of the company.

But one associate said Sumner left his office smiling Tuesday night, and others remarked that the tough-minded businessman may well be getting Blockbuster at a cheaper price than initially negotiated. (On the day the merger agreement was struck, Viacom shares closed at $41, while Blockbuster closed at $28.375.)

At Viacom’s recent price, Furman Selz analyst John Tinker called the Blockbuster acquisition “mildly anti-dilutive to Viacom” and predicted that earnings could be “marginally higher” than for Viacom and Paramount alone.

The attraction of Blockbuster is its strong cash flow and formidable presence in home video retailing. Blockbuster is expected to generate about $585 million in operating cash flow this year, while Viacom (with Paramount) will generate about $1.4 billion. Once combined, the three companies would reduce the debt load Viacom assumed with the Paramount acquisition to a more comfortable level.

“I think it’s a win-win situation,” said Lawrence Haverty of State Street Research, whose investment firm controls more than 3 million Blockbuster shares. Haverty, a vocal critic of the merger when Viacom shares tumbled, said, “Frankly, I’m surprised that the Viacom stock is where it is, but it’s there,” adding that “we will listen very carefully to the recommendation of the Blockbuster directors.”

“It’s been a long and sometimes bumpy road,” Huizenga conceded in a statement released after the board’s action. “ . . . We are pleased with the recent improvement in Viacom’s stock prices. We believe that the combination with Viacom will result in significant value for our shareholders.”

Under the terms of the deal, each Blockbuster share would be exchanged for 0.08 share of Viacom Class A stock, 0.69615 share of Viacom Class B and a “variable common right” representing the right to receive up to 0.13829 share of Class B stock depending on market prices during the year after the merger.