Blockbuster Inc, the world's number one video rentals chain, may be sold in a leveraged buyout or through a share swap as early as next week.
On Monday this week (Dec 1, 2003) Sumner Redstone, chairman of Viacom, the media conglomerate that owns Paramount, CBS and Blockbuster, told a New York investment conference, "I don't believe Blockbuster is a core brand' essentially, we're not in the retail business."
Today, The Wall Street Journal reported that Viacom, could reach a decision within the next days. The move is understood to reflect growing investor concerns about the profitability of the home entertainment sector.
In recent weeks financial analysts have cut their forecasts for Blockbuster's profitability and forward growth. One, Smith Barney, said that video piracy in the US is set to rise from an estimated $1.5bn in 2002 to $3.3bn by 2005 and that the industry needs to quickly "adapt to changes in market preference". It is concerned too that price slashing in the retail DVD sector, led by supermarket giants like Wal-Mart which use discs as a loss leader, are inciting consumers to buy rather than rent. That could mean that the higher margins Blockbuster earns from renting (it also sells tapes and discs) will be eroded.
In a recent company report the bank also worried that Blockbuster's business is focused on an increasingly limited number of top box office titles - the top 25 films now account for 50% of revenues. That makes it more vulnerable to fluctuations in the product cycle and audience responses to individual films.
Another research group, Fulcrum Global Partners recently warned that the US rental business is close running out of growth. The switch from VHS to higher margin DVDs is now largely a thing of the past, while split-revenue deals with the studios could mean a drop in gross profits.
Viacom came close to disposing of Blockbuster in the late 1990s and sold off 20% when it gave the company its own share listing. But Blockbuster's improving fortunes and strong cash flow persuaded Viacom to cancel plans to sell the remaining 80% stake.
Now Viacom is looking to sell the stake to a group of private investors in a deal worth close to the $2.5bn market value of its interest. A swap of Blockbuster shares for Viacom stock may be favoured instead as that would be more tax-efficient method and act as a buyback of Viacom paper.
With its shares up yesterday from $17.08 to $17.23, Blockbuster has a current market capitalisation of $3.12bn. Viacom was also up from $39.37 to $39.57 a share.