Interplay Tries Acquisition in Hope of Raising Its Score

By P.J. HUFFSTUTTER

Feb. 17, 1999 12 AM PT

TIMES STAFF WRITER

In a deal that could help Interplay Entertainment bolster its operations and return to profitability, the struggling Irvine-based developer of video games said Tuesday that it acquired a 49.9% stake in British competitor Virgin Publishing.

Financial terms weren’t disclosed, but the transaction involves only a “minimal” amount of cash, said Brian Fargo, Interplay’s chief executive.

Interplay, which publishes such games as “Baldur’s Gate” and “Fallout 2,” also said it signed a deal with a unit of Virgin Publishing to sell Interplay’s titles in Europe, and to market Virgin products in North America, South America and Japan.

“This lets us consolidate our two companies without any sort of corporate dilution,” Fargo said. “They need the product flow. We need the distribution. It’s a very clever deal.”

It also ends speculation about the fate of Virgin, whose status has been uncertain since last fall when Electronic Arts Inc., the world’s largest computer game maker, acquired Virgin’s software development groups in Irvine and Las Vegas for $122.5 million.

The acquisition, from Spelling Entertainment Group Inc., did not include Virgin’s European facilities because Electronic Arts already had its own distribution system in place on the continent.

A management team within Virgin’s European offices had bought the remainder of the Virgin holdings from Los Angeles-based Spelling about six weeks ago, Fargo said.

Analysts approved of the deal with Virgin, noting that it could help Interplay make the jump from a midsize player to a top-tier game developer.

“It’s good that management is making an effort to change their business model, which needed some tweaking,” said Brett Hendrickson, a research analyst at the B. Riley & Co. brokerage firm in Los Angeles. “This is a good move, and it will give them a bigger slice of the pie in Europe. But they could be left with pie on their face if they get into trouble again.”

Interplay shares fell 9 cents, to $2.53, in Nasdaq trading Tuesday.

Market watchers had expected Interplay to turn a profit for its 1998 third quarter. But delays in shipments for a couple of its key games--Earthworm Jim 3 and Messiah--caused the company to miss the crucial holiday season, plunging it into the red.

“It’s great that Interplay will have access to its own distribution,” Hendrickson said. “But they have to make sure there’s product that’s ready and available to distribute.”

Interplay said it initially will sell only a few Virgin titles, including a soccer game, in the United States next year. But the Irvine firm expects to expand its offerings by 2000, Fargo said.

In addition, Virgin will hire Interplay’s team of sales and marketing personnel, which already is based in Europe.

Interplay went public last year, but has since racked up losses and its stock has been depressed. The company posted a net loss for the third quarter of $15.1 million on revenues of $24.5 million, compared to a net loss a year earlier of $5.5 million on revenues of $23.8 million.

Interplay plans to report its year-end results, and talk to investors about its 1999 outlook, next week.

The company launched a restructuring last October, warning that its fourth-quarter results would be far below expectations as it faced cash pressures. Hoping to head off more problems, Interplay has cut its work force to 410 from about 500, and trimmed its fiscal 1999 operating expenses by about 8% over last year, Fargo said.

In addition, the company cut back its upper-management salaries and expanded its credit line, allowing the software firm to borrow up to $14 million beyond its limit, up to $37.5 million. The credit line runs through May 31.

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Interplay Makes a Play

Interplay Entertainment, facing red ink and a floundering stock value, has acquired 49% of competing game maker Virgin Publishing. Since going public in 1996, Interplay has lost more than $30 million despite increasing sales.

Interplay Entertainment at a Glance

Headquarters: Irvine

Chairman/CEO: Brian Fargo

Business: Develops and distributes electronic interactive games such as Baldur’s Gate, Fallout 2 and the Earthworm Jim series

Trade exchange: NASDAQ

52-week high: $8.25

52-week low: $1.00

Weekly Closing Prices

1998

June 19: $6.00

June 26: $6.00

July 3: $5.63