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Analysts: Spinoff Dividend Won't Bust Blockbuster

28 Jun, 2004 By: Holly J. Wagner

Blockbuster Video will still be in position to make good on its promised new business initiatives even after it pays a $5-per-share dividend as part of announced plans for Viacom to spin the chain off, analysts said.

The spinoff will give Viacom, which holds 81.5 percent of Blockbuster stock, a $738 million tax-free windfall. Blockbuster will borrow $950 million to fund the payout, which is expected to cost $905 million. The new $1.45 billion credit facility with JP Morgan, Citigroup and Credit Suisse First Boston will be used to finance the special distribution and replace the current revolving credit facility, which expires July 1.

“We are pleased to be moving forward with our split-off from Viacom, and we believe that by becoming a separate company we will be better able to pursue our retailing strategy,” Blockbuster chairman and CEO John Antioco said. “Additionally, we believe issuing a special cash distribution will offer value to our stockholders without inhibiting us from executing our business plan.”

Blockbuster executives will ask shareholders at a July 20 annual meeting in New York to ratify the new corporate structure, new directors, management incentive and director compensation plans. The new structure includes bylaw changes that will make it more difficult for outside entities to mount a hostile takeover.

Despite the debt the chain is taking on, Blockbuster will have enough cash flow to fund plans, said analyst Dennis McAlpine. “The in-store subscription [program] is going to be easy,” he said. The online component won't require as much funding as Netflix, he said, considering Big Blue has the supply chain and revenue-sharing deals in place, and consumers are familiar with online rental now. “If they screw it up, then you have a whole different problem,” he said. “They will have 4,000 [online rental] terminals to manage to Netflix's 25.”

McAlpine and Jennifer Jordan, a Wells Fargo analyst, said the Blockbuster brand and customer database are the chain's biggest assets.

“They did about $400 million in free cash flow last year. This year is projected at $280 million. We certainly think their cash-generation ability is in that $400-million range as they get through [rolling out] these new initiatives,” Jordan said, adding that the spinoff could have unforeseen benefits.

“There may be some hidden efficiencies to be gained once they get out from under Viacom,” she said. “Our expectation is that cash flow returns, and this could be a $17 stock again.”

Antioco will get a 25 percent raise and a five-year contract renewal after Viacom spins the company off, according to documents filed with the Securities and Exchange Commission in support of the deal. Although the company has not made money since 1999, Antioco booked his $1.75 million annual salary and deferred compensation plus a $5.305 million bonus last year.

“The senior executive compensation committee believes that Antioco was instrumental in the company's achievement of record revenue and profitability during 2003,” the filing states.

Antioco's existing contract runs through Dec. 31, 2006. His contract after the spinoff, according to SEC filings, is a five-year deal that bumps his base salary by a quarter of a million dollars a year to $1.25 million a year and his deferred compensation to $1 million a year plus an additional $150,000 each year starting next Jan. 1. His annual bonus is structured at 150 percent of his salary and deferred compensation.

Other provisions in the contract include a $7.5 million bonus to Antioco if the spinoff isn't completed by June 30, 2005.

“They obviously don't think they can run it without him,” McAlpine said.

Blockbuster's stock price slipped following the announcement June 18. It closed at a 52-week low of $14.80 June 23, then had a small rebound, to close at $14.85 June 24.

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