Wherehouse to Buy Blockbuster Music

Viacom Inc. on Tuesday agreed to sell its lackluster Blockbuster Music chain to Torrance-based Wherehouse Entertainment Inc. for $115 million in cash, in a deal that would catapult Wherehouse into the ranks of the nation’s leading music retailers.

With the acquisition of Blockbuster Music--the sister chain of Viacom’s Blockbuster Video chain--Wherehouse will go from regional retailer to the country’s No. 2 music chain, ranking only behind the Minnetonka, Minn.-based Musicland Stores Corp.

Wherehouse has 220 stores in seven Western states, but two-thirds of those stores are in California. Blockbuster has 378 music shops in 33 states, including a large number of stores in California, Texas, Florida and Illinois.

“Most retailers accept the notion that size matters in a variety of areas . . and this helps make us a heavyweight,” said Wherehouse Chairman Tony Alvarez. “It should give us buying power leverage with suppliers and synergies that will help us reduce advertising and distribution costs.”

Except in Southern California, the two chains do not have much of an overlapping presence. Both chains have their largest concentration of stores in the Southland--Blockbuster at 52 and Wherehouse at about 70.

Alvarez said Wherehouse has no immediate plans to close or sell any stores that may be in the same neighborhood, saying, “We’ll wait and see how these overlapping stores perform.”

Wherehouse has been moving aggressively to expand its holdings in the music industry since it emerged from bankruptcy last year. Burdened with debt and facing fierce competition, the company filed for bankruptcy reorganization in August 1995.

Wherehouse has begun moving into ethnic markets. Last month it opened in La Puente its first Tu Musica store, which specializes in Latin music. It plans to open eight to 10 more Tu Musica stores in Latino neighborhoods nationwide this year.

Alvarez said the company might also convert some Blockbuster Music stores to Tu Musicas but that no decision has been made.

Alvarez, a turnaround specialist, joined Wherehouse just over a year ago from his consulting firm, Alvarez & Marsal of New York. He was hired by Cerberus Partners, the New York-based investment group that acquired control of Wherehouse during the bankruptcy proceedings.

Wherehouse posted operating earnings of $24 million in 1997, compared with $1.6 million in 1996.

Wherehouse had been negotiating with New York-based Viacom for Blockbuster Music for several months. Viacom--the media giant that owns Paramount Pictures, Blockbuster Video stores and other companies--has been unhappy with the performance of Blockbuster Music, which lost $71.6 million for 1997 on sales of $605.7 million. Viacom acquired the chain as part of its $8.4-billion purchase of Blockbuster Entertainment in 1994.

Blockbuster Entertainment tried to revive the operation last year by turning it over to the managers of its more successful video division. However, the strategy was abandoned when Blockbuster Entertainment Chairman Bill Fields resigned in May. His successor, former Taco Bell President John Antioco, set up a separate management team at Blockbuster Music.

“Blockbuster Entertainment concentrated primarily on its video business and never really had a feel for the music business,” said Harold Vogel, an industry analyst at S.G. Cowen Securities in New York. “Considering the problems, this was probably the best deal Viacom could get.”

*

Music industry observers said that Wherehouse got the chain for less than the $200 million a chain of that size would otherwise be expected to fetch.

Wherehouse sells and rents videos, but music sales account for about 70% of its revenue.

The deal is expected to close in October.

Wherehouse said it will begin to convert the Blockbuster sites to Wherehouse stores in January and expects to complete the conversion by mid-1999. The conversion process will begin in California and other Western states.

Viacom Class B shares fell $3.63 to close at $59.81 on the American Stock Exchange.