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Viacom puts Blockbuster split in play

Stock swap in works

NEW YORK — The marriage of Viacom and Blockbuster may be drawing to a close as the entertainment giant took its first formal step toward unloading the video retailing unit, filing with the Securities and Exchange Commission to swap the rest of its Blockbuster stock for outstanding Viacom stock.

Viacom owns about 80% of Blockbuster after selling off a chunk of the company in an initial public offering last summer. On Tuesday, Viacom announced plans to exchange, at some future date, the 144 million or so Blockbuster shares it still holds for outstanding Viacom shares, assuming that Viacom shareholders will play along.

The process, called a “Dutch auction” in financial parlance, will ensure that the rate of exchange includes a premium for Viacom holders, giving investors the chance to swap $100 in Viacom stock for, say, $115 in Blockbuster stock.

Investor negotiations

How much of a premium investors will need to swap Viacom for Blockbuster remains to be seen. “If a 5% premium isn’t enough, you go to 10%, or 15%. That’s why its called an auction,” noted one Wall Streeter said.

The method is often chosen in lieu of an outright sale because it’s tax efficient. Viacom said in the filing it still needs a statement from the IRS that the deal would be tax-free to Viacom and its shareholders after taking into account the company’s pending merger with CBS.

Hopes to hit $20

Viacom also stated in no uncertain terms that the whole plan is contingent on Blockbuster’s stock price hitting at least $20. The stock has been sluggish since it went public in August, not moving much beyond $15. Despite the company’s powerful brand and nearly 30% market share, its livelihood could be challenged by the eventual rollout of digital cable, which gives consumers more choice of product, and video-on-demand, which lets them rent movies without leaving home.

Blockbuster shares firmed Tuesday, up 25¢ to $16. Wall Streeters think it could hit $20, especially with CBS topper and super-salesman Mel Karmazin moving into the Viacom fold.

Viacom said it wants to sell Blockbuster because the two companies are in different businesses — respectively, media/entertainment and consumer retailing — and because other movie studios may perceive a conflict of interest in Viacom’s ownership of Paramount. Like the other major studios, Par has a revenue-sharing deal with Blockbuster.

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