NEW YORK — Viacom Inc. finally took formal steps to spin off its Blockbuster video unit Thursday, filing a long-expected prospectus for an initial public offering of a minority stake expected to occur later this summer.
The entertainment conglom, which also own MTV Networks, Paramount, 19 television stations and movie screens in 12 countries, also revealed it had applied for Internal Revenue Service approval for the spinoff of its entire Blockbuster stake in a second deal within six months of the initial public offering.
Viacom said it will sell up to 20% in the IPO but will spin off the remaining 80% in a share exchange with its shareholders. In the exchange, Viacom shareholders will have the chance to swap some or all of their Viacom stock for shares in Blockbuster.
Viacom chairman Sumner Redstone won’t participate in the share exchange, thus increasing his stake in the company to the degree other Viacom shareholders opt to swap stock for Blockbuster shares.
Viacom bought Blockbuster five years ago for $8.5 billion in an exchange of shares.
The plan was to use the leading video-rental chain, with 6,500 domestic outlets, as a cash cow to help pay down debt incurred by Viacom’s takeover of Paramount.
The decision to sell, according to the prospectus, stemmed from a desire to “resolve management, systemic and other problems that have arisen from the operation of the two groups of businesses under a common parent corporation.”
Specifically cited as advantages to a split-off company were:
- an ability to grow through acquisitions “by using our stock and by entering into partnerships”
- a compensation structure “more in line with that used by other retailers”
- an incentive system more closely linked to performance.
Last week, while releasing first-quarter results, Viacom reported that its Blockbuster subsidiary continued to drag on overall performance by posting a 13% decline in cash flow (earnings before interest, taxes and depreciation), despite a 20% gain in video revenues.
Viacom blamed the video division’s cash-flow slide on beefed up ad expenses and on accounting technicalities caused by the change in the year-earlier quarter to the revenue-sharing model now in place.
The revenue-sharing model, based on agreements with all the major studios, lowers Blockbuster’s inventory costs but repatriates some rental revenues back to the studios.
Analysts have expressed concern that the model has helped Blockbuster spruce itself up to go public by allowing it to buy market share at the expense of earnings.
The chain’s U.S. market share currently stands at 27% — more than three times greater than its nearest competitor.
Concerns about earnings may even have been responsible for delays in the IPO, which was originally expected in the first quarter.
According to the prospectus, Blockbuster had a net loss of $336.6 million in 1998 on sales of $3.9 billion
The prospectus also reports that Blockbuster had total capital of $7.3 billion at year-end, of which $1.7 billion was long-term debt.
The bulk of the debt related to a $1.4 billion note Blockbuster obtained from Viacom to purchase foreign Blockbuster operations from Viacom affiliates and to add to working capital.
The offering’s lead underwriters, Salomon Smith Barney and Bear, Stearns & Co., won’t price the IPO until it obtains regulatory clearance and the underwriter syndicate is ready to put the shares on the market.
All of its proceeds will be used by Blockbuster to repay borrowings under a $2 billion revolving credit agreement with a syndicate of lenders.
After the completion of the initial offering, Blockbuster will remain under the control of Viacom, due to its 100% ownership of a class B stock that provides five votes per share, compared with the issued stock’s providing one vote per share.
The prospectus also includes a backup plan for the spinoff in the event the amount of Viacom common stack tendered in the exchange isn’t sufficient to distribute all the Blockbuster shares held by Viacom.