In a surprise move, Blockbuster Entertainment Corp. has taken a major stake in Republic Pictures Corp., giving the TV and film production company preferential access to video store shelves and a tremendous cash infusion.

The nation’s largest video retailer, and one of the largest music retailers, is plunking down $ 25 millionin cash or Blockbuster shares, to acquire a 35% stake in Republic.

The price, valued at $ 10 a share, is nearly a 30% premium to Republic’s closing price of $ 7.75.

“It increases our capital base significantly,” said Republic chairman Russell Goldsmith. “That in turn enhances our capability to produce and acquire filmed entertainment.”

Blockbuster gets a window on Hollywood.

Learning opportunity

“It’s an opportunity, for a small investment, to learn about the programming business,” said vice chairman Steven Berrard. “It’s a continued extension of our focus on entertainment.”

In recent months, Blockbuster has consummated several deals worldwide, including the purchase of record-retailers Music Plus and Sound Warehouse in October for $ 125 million, and a partnership with Britain’s Virgin Group for a chain of stores in Europe and the U.S. valued at around $ 150 million.

Blockbuster counts Philips Electronics N.V. as a major shareholder.

Now, Republic can count on access to Blockbuster’s retail and rental channel, which boasts 2,989 stores worldwide.

“Clearly, to have that kind of formidable partner means your product gets better shelf space,” said Jeff Logsdon, an analyst with Seidler Amdec Securities Inc. in L.A. “And they get out of debt.”

Blockbuster chairman Wayne Huizenga and Berrard will join Republic’s board.

Database access

Beside getting the pair’s counsel, Goldsmith will have access to Blockbuster’s highly regarded customer database. “We have a 30 million-member database of what our customers like, and want to share that with Republic for when they acquire product,” said Berrard. “We know what people like and don’t like, by genre and actor.”

The proceeds from the deal, said Goldsmith, will be used to pay down $ 22 million in borrowings under a $ 50 million credit line with Chemical Bank. This will eliminate some $ 305,000 in quarterly interest expenses. The entire transaction is expected to be completed during the second quarter.

It appears Goldsmith is building a stable of strategic investors. A year ago, Goldsmith sold 6% of Republic to Technicolor Inc. for $ 3 million. That deal likely resulted in a favorable video duplication arrangement.

Baseball sparked investment

The Blockbuster investment was sparked last fall by a meeting of baseball club owners. Goldsmith is a partner in the San Diego Padres and Huizenga has a stake in the Florida Marlins.

To simplify Republic’s stock structure, the company will redeem its Class B common, which carries preferred voting rights, for its Class A common. For every 100 Class B shares, shareholders will receive 120 shares of Class A.

A majority of Class B shares are held by Paragon Group, which is controlled by Goldsmith and his family. The second largest stake is held by Bob Magness, chairman of Tele-Communications Inc. and a Republic director.

Raised prod’n profile?

The exchange will expand Republic’s common stock to 7.3 million shares.

Blockbuster has the right to acquire up to 810,000 additional shares for $ 10 to $ 11.50 apiece over the next 10 years, equalling a total price of $ 9 million.

The Blockbuster investment raises speculation that Goldsmith wants to raise his profile in theatrical production.

Today, “Knight Moves,” starring Christopher Lambert, hits theater screens. Last year, the company produced “Cadence,” featuring Charlie Sheen.

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