Viacom’s Plan for Blockbuster Spinoff Cloudy

Viacom Inc., the world’s fifth-largest media company, may scrap a plan to split off its Blockbuster Inc. video rental chain because of the unit’s weak stock price, a person familiar with the company said.

Blockbuster went public in August by selling an 18% stake for $15 a share. Viacom had planned to spin off the rest of the company to its own shareholders. The Wall Street Journal reported Wednesday that Viacom may not go forward with the spinoff. Blockbuster fell $1.06 to close at $13.56 on the New York Stock Exchange.

Separately, Blockbuster said its third-quarter loss narrowed from last year as cash flow rose amid higher sales, helped by an increase in stores. The company said its net loss was $19.1 million, or 12 cents a share, compared with $21.5 million, or 15 cents, in the year-earlier period. Revenue rose 13%, to $1.1 billion from $985.4 million.

Viacom Chairman Sumner Redstone has said he wants to separate Blockbuster from the company because it’s essentially a retail business and isn’t getting the valuation it deserves on Wall Street because it’s mixed in with Viacom’s other businesses, which include the Paramount Pictures studio and MTV Networks. Blockbuster’s shares, though, have fallen since the initial public offering, making a spinoff at its current stock price less attractive now.

“They’re saying, ‘We don’t want to give it away at [its current] market value,’ ” said Scott Davis, analyst at Schroder & Co., who rates Blockbuster shares “outperform.”

A Viacom spokesman declined to comment on whether the company will scuttle the spinoff.

Viacom shares rose 44 cents to close at $41.13 on the New York Stock Exchange.

Viacom had said previously that the spinoff might be delayed or canceled. In a proxy filing with the Securities and Exchange Commission earlier this month, it said that “the split-off may not occur” and that Viacom “has no obligation to effect the split-off either before or after the merger,” referring to its planned acquisition of CBS Corp.

Blockbuster Chairman John Antioco said he’s hopeful the spinoff will occur eventually.

“We are a focused retailer, and the rest of Viacom has a little different focus. Our destiny is to be a fully free-standing company,” he said. “Everyone would like to complete this split-off during the first half of next year, but we’ve always qualified it by saying it’s subject to market conditions. We’re hopeful the split-off will occur as planned,” he said.

Viacom also wants to complete the spinoff to let Blockbuster sharpen its focus on its video rental business while removing perceived conflicts of interest with Viacom movie units, including Paramount.

“I think it is a surprise,” said Barry Hyman, an analyst at Ehrenkrantz King Nussbaum Inc. “The goal here was to do an IPO and try to separate the value in Blockbuster and have it trade as the biggest player in that sector and then at some point give the rest to shareholders.”

New York-based Viacom bought Blockbuster for $8.4 billion in 1994. A slump in video rentals followed. Sales then rebounded, though Dallas-based Blockbuster still lost $336.6 million last year, compared with $318.2 million in 1997.

Recently, its business has been turning around. The company said Wednesday that its third-quarter loss narrowed from last year as it opened new stores and attracted more customers. Blockbuster continues to gain market share, and sales at stores open at least a year have been rising.