B’buster still bumpy

Stock offer in doubt as chain's woes continue

NEW YORK — Viacom’s plan to sell stock in its Blockbuster Entertainment Group early next year is in doubt as the video rental chain’s performance worsens, Wall Street analysts say.

Viacom execs began warning investors last week that delays in the construction of Blockbuster’s distribution center in Dallas were causing problems with distribution of Blockbuster tapes and contributing to a continuation of business slowdown, Wall Street sources said. Viacom declined comment Friday.

At the same time, rental revenues continue to decline. Tom Wolzien, an analyst with Sanford C. Bernstein, says a week-by-week study of rental figures co-sponsored by Bernstein shows the industry rentals to be down close to 8% for the year to date.

Blockbuster’s revenues are tracking those of the industry, sources say. For the first two months of the second quarter Blockbuster’s “same store” sales are down at least 8%, while the figures for June are not yet available. Same store revenue numbers, which adjust for the impact of new store openings, fell 2% in the first quarter.

Word of the poor second quarter has triggered a sell-off in Viacom stock over the past two weeks, taking it down 17% to Friday’s close of $29.75.

Offer in question

The continued poor performance of Blockbuster is raising questions about Viacom’s ability to carry out its promise to sell 20% to 40% of the stock in a public offering early next year. When the offering was announced in April, Viacom chairman Sumner Redstone promised that the video chain would show a turnaround by the second half of this year, but now analysts are questioning whether that is likely.

“I don’t understand how they could get to the point where they would be able to sell the (Blockbuster) tracking stock,” said Cowen & Co. analyst Harold Vogel.

Wolzien said that even if rental numbers improve in the second half, it won’t be enough to overcome the first-half decline. He predicts Blockbuster’s earnings before interest, taxes, depreciation and amortization will decline 10% to 15% this year, adding that Viacom may change its plans and spin off Blockbuster by issuing stock in the video chain as a dividend to Viacom shareholders.

Analysts say Blockbuster would need at least one quarter with positive revenue and earnings growth before it can go to the market with a stock offering.

“It would be very difficult to sell the stock if you still have fundamentals in flux and a transition in management,” said one money manager Friday. Blockbuster’s newly appointed CEO, John Antioco, is yet to start work.

One of the major challenges facing Antioco when he starts is Blockbuster’s troubled distribution. Under the direction of former Blockbuster CEO Bill Fields, the video chain’s distribution arrangements were terminated in anticipation of the new center, sources say.

But poor weather has delayed completion of the center, which now isn’t likely to be finished until the end of the year. Blockbuster is using temporary workers to repackage tapes, which is causing problems, with tapes going to the wrong stores, sources say.

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