Viacom Seeks Spinoff of Blockbuster Stake Amid Uncertainty in Video Rentals’ Future

Viacom Inc. isn’t waiting to see how this blockbuster ends.

The media conglomerate said Tuesday it would probably spin off its 81% stake in Blockbuster Inc. by giving Viacom shareholders the option of swapping their Viacom stock for shares in the nationwide video rental chain.

Blockbuster’s growth has slowed as consumers have increasingly turned to other sources, buying DVDs at discount retailers such as Wal-Mart Stores Inc., for example, or renting movies from online retailers, including Netflix Inc.

Analysts say Blockbuster could grow weaker still as movies-on-demand services sold over cable and the Internet become more popular. Forrester Research projects home video rental revenue in the U.S. to dip to $7 billion in 2008, from $10.2 billion last year.

“DVDs will go the way of the LP,” Forrester analyst Josh Bernoff said.

Viacom had considered selling the chain to a private equity firm, but sources said none was willing to pay close to Blockbuster’s stock market value of $3 billion, given the uncertain future of the video rental business.

Viacom said it has yet to determine the exchange ratio it would offer shareholders who trade into Blockbuster.

Analysts expect Viacom to give them a healthy incentive. Some predict a discount of as much as 20%.

During a conference call, Chief Executive Sumner Redstone said Blockbuster would be better off as an independent company because it was “moving away from our areas of core focus.”

Viacom also owns CBS Television, MTV Networks, Paramount Pictures, Infinity radio, Showtime and BET.

“Blockbuster would like to pursue a strategy not in the interest of Viacom,” said Jeffrey Logsdon, an analyst at Harris Nesbitt Gerard. He said Viacom would have to invest hundreds of millions of dollars in the next few years to finance Blockbuster’s entry into the video game rental and online DVD rental business.

Logsdon said that the sale of Blockbuster would improve the long-term prospects of Viacom.

Indeed, shares of Viacom jumped 96 cents Tuesday on the New York Stock Exchange to close at $41.35. “What investors are saying is ‘We like how you’re positioned from a ratings, programming and advertising perspective,’ ” Logsdon said.

Viacom derives about half its revenue from advertising, and the sale of Blockbuster would make it more dependent upon that source. During the company’s earnings announcement Tuesday, Viacom President Mel Karmazin said all divisions would have revenue growth this year.

Results were mixed for the fourth quarter. The net loss of 22 cents compared with a profit of 37 cents, or $652.4 million, a year earlier. Revenue increased 11%, to $7.52 billion, fueled by DVD sales of movies such as “The Italian Job,” and the continued strength of Viacom’s cable networks group, which includes MTV, VH1 and Comedy Central.

Revenue of the television and radio groups declined by 1% and 2.5%, respectively, during the fourth quarter. Karmazin said the lack of political advertising in 2003 made for tough comparisons for the television group. Karmazin said the radio group, a continuing problem, would be an important contributor to Viacom this year.