Spelling plans offering to sell Virgin Interactive

NEW YORK — Viacom Inc.’s Spelling Entertainment Group said Thursday it would sell Virgin Interactive later this year in a public stock offering expected to value the game company at up to $250 million.

The sale is likely to improve Spelling’s bottom line, as Virgin Interactive has been losing money in the past couple of years as a result of a downturn in the interactive games business. “Virgin Interactive is outside of the core asset base,” a Spelling spokeswoman said Thursday. News of the offering helped Viacom stock rise 12¢ to $35.87, although Spelling was unchanged at $6.87.

Virgin develops and sells entertainment CD-ROMs and products for the Sony PlayStation and Nintendo 64. Among its titles are “Aladdin” and “The 7th Guest.”

The offering highlights how attitudes toward interactive game companies have changed among the major entertainment companies. Eighteen months ago, when Viacom decided to sell Spelling, it said it would buy Virgin Interactive out of Spelling before the sale. While it abandoned the Spelling sale some time ago, the collapse in the games market appears to have killed off any interest in buying Virgin.

And while the games market has begun a tentative recovery, people close to Viacom said Thursday it is now clear that interactive game developers functioned best as independent entities. “The ability to generate higher level of profit through ownership of these properties is not there,” said Sean McGowan, an analyst with Gerard Klauer Mattison, adding that the majors could still earn royalty revenue from licensing entertainment properties to the games developers.

Prospects for Virgin’s offering rest on the health of the interactive game business and Virgin’s earnings recovery. Virgin, which is 91% owned by Spelling and 9% by Viacom, lost $14.3 million in 1995 and $16.7 million in the first half of last year on sales of about $200 million.

Spelling has not reported Virgin’s earnings since the second quarter of last year and a Spelling spokeswoman declined comment on whether it was still losing money, although Wall Street analysts say its performance hasn’t improved dramatically.

That may be the reason why Spelling decided to unload Virgin through a public offering rather than in a sale to another games developer. UBS Securities analyst Michael Wallace predicted in a report on the industry last year that consolidation among consumer software manufacturers, including games companies, would “intensify in 1997,” and he mentioned Virgin as a possible acquisition target.

And while Spelling said it has hired UBS to handle the offering, Wall Street sources say other investment bankers are shopping Virgin around for a straight sale. It is conceivable that progress on the offering will “smoke out” a buyer, sources say. Spelling declined comment.

Nevertheless, Wall Streeters say the IPO stands a good chance of getting done, although it is likely to be priced lower than the leading game companies like Electronic Arts or Activision. Virgin has a well-known brand name and a strong presence in Europe, and its big advantage is that it develops software for all the platforms — CD-ROMs for personal computers as well as the Sony PlayStation and the Sega Saturn, Wall Street analysts say. UBS is likely to use its European presence to market the offering heavily there.

Banking sources say the games developers are valued at between 1-2 times annual revenue and that Virgin’s offering price is likely to be at the lower end of that ratio. How much the offering would raise would depend on how much debt Spelling will transfer into Virgin, which hasn’t been determined yet, a Spelling spokeswoman said.