Virgin, Blockbuster join for expansion

Richard Branson’s Virgin Group has joined forces with Blockbuster Entertainment Corp. to launch an aggressive expansion of the Virgin Megastore chain in the United States, Europe and Australia.

Recently, both companies have embarked on an accelerated effort to diversify into new markets.

Just three weeks ago, the Ft. Lauderdale-based Blockbuster announced it was acquiring Music Plus and Sound Warehouse, two U.S. music store chains with a combined 1,500 outlets, for $ 185 million in cash and stock.

In June, Branson’s Virgin Group sold off its music label to Thorn EMI for $ 1 billion, and is plowing some of the proceeds into its new burgeoning retail and distribution arms.

The two giant retailers have formed a 50/50 joint venture to share Virgin’s interests in 15 existing Megastores, situated in continental Europe and Australia. In the United States, Blockbuster will have a controlling 75% share.

The deal has been brewing for four months, said Richard Branson, chairman of Virgin Retail Group Ltd. It was initiated soon after the London-based entrepreneur announced he was seeking partners for Megastores around the world.

The first Megastore in the United States opens Dec. 4 in Los Angeles, on the corner of Sunset and Crescent Heights boulevards.

It will offer video rental, recorded music, videos and video games, and entertainment-related clothing and books. Though it isn’t part of the current deal, Blockbuster will own a slice of the store, in which it will have a 4,000 -square-foot rental area. In future stores, it will have one-quarter of the typical 40,000-foot shopping space.

“We felt if we could get together, it’d be the perfect marriage,” said Branson. “Blockbuster’s expertise in (video) retailing in the States is greater than ours. We understand music retailing.”

The combined power of the two companies, he said, should generate $ 1.5 billion in worldwide sales in five years. For 1992, before this deal, Virgin’s consolidated sales were expected to top $ 1.4 billion, while Blockbuster’s should hit $ 1.1 billion.

Blockbuster executives were unavailable for comment.

The two-tier deal does not include the Megastores in the U.K., where Virgin is already partnered with W.H. Smith Group PLC, or in Japan, where Virgin has a joint venture with Marui Co. Ltd.

Blockbuster has its own high-profile presence in both those countries.

“When Blockbuster bought (Music Plus and Sound Warehouse), it mentioned Virgin as the type of the store they’d emulate,” said Paul Marsh, an analyst with County NatWest Securities USA in New York. “Allying with Virgin gives access to a $ 20 billion worldwide music business.”

Indeed, Blockbuster had its own plans to expand into home entertainment retailing, in addition to its core video rental business, and the two companies decided to pool their resources.

The goal in the U.S. is to open 50 stores in major cities, with a total of 200 worldwide. Each will feature a Blockbuster department.

The amount Blockbuster paid to acquire 50% of Virgin’s existing Megastore interests will not be revealed until a later date. But the two companies reportedly are investing $ 150 million over the next 2 1/2 years in the venture.

The development of the U.S. Megastore chain will be wholly financed by Blockbuster, but Virgin will be responsible for the management of the stores, and the partners will be equally represented on the board of the joint company. If it is a big moneymaker, Virgin has an option to increase its stake to 35%.

However, success may not be around the corner. Looking at the 15 European stores, only the four that have been open for at least three years are profitable, according to a source. The oldest, on Paris’ Champs Elysees, turned in $ 125 million in sales last year. The rest are expected to come into the black after they reach the three-year threshold.

The current Megastores are located in France, Germany, Austria, Spain, Italy, Holland and Australia. Virgin owns large majority stakes, while local partners hold the remaining shares. For example, Canal Plus has a 10% stake in the three French shops.

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