Triple Whammy Hits Viacom’s Blockbuster

Bill Fields, the much-touted retailing executive recruited by Viacom Inc. last year to turn around its ailing Blockbuster Entertainment video chain, abruptly resigned Tuesday amid worsening results that Viacom Chairman Sumner Redstone said blindsided him.

The Fields disclosure came in a three-part announcement that shook Wall Street. Viacom also disclosed that Blockbuster’s critical cash-flow results would be off by as much as 20%. Finally, Viacom said that next year it aims to sell a small piece of the Dallas-based video chain to the public to reduce Viacom’s $10-billion debt and to allow the operation to be more easily valued by investors.

Wall Street hammered Viacom’s stock, sending the company’s Class B shares plunging $3.75, or nearly 14%, to $27.25 on the American Stock Exchange. “This suggests the company can’t be fixed, or management can’t be fixed,” said one senior entertainment executive.

Several analysts who had been recommending investors buy the stock downgraded their recommendations to “neutral.” The news further hurt Viacom’s credibility with analysts and investors. The company already was suffering from a series of downward revisions in its results and debates over whether its post-acquisition accounting practices for Blockbuster temporarily inflated its results and stock price in 1995.

Investors also have questioned whether Viacom has sufficient management strength at top levels. Last year Redstone abruptly fired Frank J. Biondi Jr., who was well regarded on Wall Street, as chief executive to take a more direct role himself in the management of the company. Biondi is now chairman of Universal Studios Inc.

“It’s pretty tarnished right now,” said Smith Barney analyst Jill S. Krutick. “This was a triple whammy.”

In an interview Tuesday, Redstone refused to characterize Fields’ departure as a firing, sticking with the company’s position that Fields, the former Wal-Mart Stores Inc. heir apparent, wants to return to general retailing. No successor was named, although Redstone said a group of qualified executives is being considered.

“We both reached a conclusion that he should resign. I didn’t fire him, and he didn’t run away. We both reached a conclusion that he and we would be better off if he resigned,” Redstone said.

Yet Redstone made it clear that he was steamed by a bombshell--one he acknowledged further hurts Viacom’s credibility--delivered in the last few days when he discovered Blockbuster’s results for the first quarter would be much worse than executives had been told. Redstone said the previous estimate that Blockbuster’s cash flow would be off by about 5% was given to him just before the quarter ended March 31. He said he can’t understand why he didn’t get a more accurate number with the quarterly nearly over.

“Can I say I was somewhat disturbed,” Redstone said when asked his reaction to getting the bad news.

Asked what Fields said to him to explain, Redstone said the executive didn’t deliver the news himself and indicated that the two men didn’t even bother to discuss it. “What would be the point of saying anything to somebody who is about to leave?”

Redstone added: “We depend on our managers for their estimates,” he said. “You can’t run a diversified company like Viacom without being able to depend on the estimates.”

Fields could not be reached for comment. One source said he takes no severance pay with him in leaving.

Redstone denied a rumor circulating in the video industry that he and Fields disagreed over the size of the piece of Blockbuster that Fields would get in a spinoff. He also denied talk within the industry that he and Fields have been at odds for some time and that Viacom executives were disappointed in his performance.

Last year, Redstone was quoted in Fortune as saying of Fields, “the day he walked in was a blockbuster day,” even going so far as to suggest that Fields was a potential heir apparent. “Bill is one of the few people who could run Viacom someday,” Redstone told the magazine.

Blockbuster, whose slogan is “One World,” has turned into a world-class problem for parent Viacom. The chain is the nation’s largest, with 5,300 video stores, but it has been hurt by a number of problems, including changing rental patterns by families who now often opt to purchase tapes. In addition, video stores face competition from pay television offerings from cable and satellite systems.

Viacom is blaming a shortage of top movies in the first quarter for hurting Blockbuster’s immediate results, as well as higher-than-expected costs and distractions stemming from relocating Blockbuster’s headquarters from Fort Lauderdale, Fla., to Dallas. Viacom previously cut back on Blockbuster’s ambitious expansion plans, a decision Redstone said Fields agreed with.

As for the public offering, Redstone said a small portion of Blockbuster--perhaps 10% to as much as 20%--would be sold to the public, adding that a full spinoff of the company would be prohibitive due to excessive capital gains taxes. Viacom will wait until next year to make that move, which sources close to the company said was being done because the company feels its credibility and Blockbuster’s troubles would make the offering difficult now.

Redstone said the spinoff, which some analysts believe could help cut Viacom’s debt by $1 billion or so, will also help investors see that Viacom’s other businesses--including Paramount Pictures, MTV and Nickelodeon--are doing well. Redstone said investors have dragged down Viacom’s stock by unfairly overlooking successful units and focusing almost exclusively on Blockbuster’s troubles.

“The issue for Viacom for a long time has been Blockbuster, Blockbuster, Blockbuster--or as it was called by one of you guys: ‘Stockbuster,’ ” Redstone said.

Redstone said large investors he spoke with Tuesday reacted favorably to the idea of spinning off a piece of Blockbuster. Asked why Viacom’s stock was pummeled, Redstone said: “Believe it or not, it’s because of Bill Fields.”

Viacom bought Blockbuster for $8.4 billion in 1994, in part because the company’s strong cash flow would help it complete its $10-billion acquisition of Paramount Communications.