Stock market realities may be forcing Viacom to return its deal with Blockbuster Video to the shelf, unopened.

The outlook for the proposed Viacom-Blockbuster merger was particularly gloomy Thursday, as both Viacom CEO Frank Biondi and Wall Street analysts questioned its viability.

“Given today’s market prices, it will be a difficult deal to close,” Biondi said at a meeting of the Hollywood Radio & Television Society.

Since Viacom’s proposal in early January, the price of its Class B shares has fallen more than 45%, to the point where Blockbuster shareholders would have to accept far less than the current market price of their stock in order for the merger to go through.

A research note, released Thursday by S.G. Warburg’s Lisbeth Barron, didn’t mince words, stating, “We believe the merger between Blockbuster and Viacom will not occur.”

Like Biondi, Barron attributed this conclusion to market realities.

At current market prices, Viacom’s offer to acquire Blockbuster is valued at less than $ 20 per share. With Blockbuster shares closing up one-eighth to $ 25. 63 Thursday, it is unlikely that Blockbuster shareholders will accept Viacom’s offer.

Biondi also killed market speculation that Viacom would sweeten the Blockbuster deal by issuing additional shares, calling the proposal unlikely.

To do so, Viacom would have to issue 125 million additional Class B shares to Blockbuster, something that would dilute the value of Viacom’s existing shares.

“The likelihood of the deal going through will be solely dependent on where the stocks are trading when shareholders have to vote … at this level, there would be little reason that shareholders would vote to approve,” said Chris Dixon, a PaineWebber motion picture analyst.

Blockbuster officials declined comment.

Designed to help

The proposed Viacom-Blockbuster merger was designed to help Viacom finance its recent takeover of Paramount Communications. Now, with the deal all but dead , Viacom may shed more of its assets for much-needed cash.

“We’re very prepared to do the Viacom-Paramount combination … If, in fact, Blockbuster is not going to happen, we’ve had the luxury of having a lot of inquiries about a lot of assets,” Biondi said.

With Biondi obstinate that the film studio, studio operations and publishing wing will remain, it looks likely that Viacom will put its sports division on the block. Sale of the unit, which includes Madison Square Garden and theNew York Knicks and Rangers, could yield an estimated $ 750 million.

However, according to some analysts, Wall Street may be underestimating the cash flow a combined Viacom-Paramount will yield.

“It’s very easy to dismiss the potential for Paramount’s growth … many analysts have not taken a hard look at Paramount’s upcoming slate of movies,” Dixon said.

New lean regime

The PaineWebber analyst also pointed to Jonathan Dolgen assuming the head of Paramount and initiating cost controls as one more reason “cash flow is most likely to be greatly improved.”

As for Blockbuster, analysts are convinced the company will continue to flourish as a stand-alone. Goldman Sachs, Paine-Webber, and S.G. Warburg all rated the company a “buy” this week, predicting it would continue to sustain current growth rates.

According to Warburg, “Blockbuster is on track for 20% operating cash flow and 25% earnings growth in each of the next three years,” and the company will hit $ 35 per share in a year’s time.

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