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Blockbuster/Viacom Stock Exchange Offered

8 Sep, 2004 By: Holly J. Wagner

Viacom is offering 5.15 Blockbuster shares for every Viacom share in a tax-free exchange offer to Viacom stockholders designed to further the split of the two companies.

Viacom stockholders will be allowed to exchange their Viacom shares for shares of Blockbuster that Viacom holds.

The exchange offer is the next step in the spinoff following a $5-per-share special dividend to Blockbuster shareholders that netted Viacom, which holds an 81.5 percent stake in Blockbuster, about $738 million. That dividend was payable Sept. 3 to shareholders of record Aug. 27. The exchange offer will expire at midnight Eastern time Oct. 5.

Under the terms of the offer, each holder of Viacom Class A Common Stock and Viacom Class B Common Stock will receive 5.15 shares of Blockbuster stock, consisting of 2.575 shares of Blockbuster Class A Common Stock and 2.575 shares of Blockbuster Class B. Assuming the exchange offer is fully subscribed, Viacom will dispose of its entire ownership interest in Blockbuster.

Any shareholder accepting the offer would receive shares of Blockbuster at a premium of about 19.2 percent over the Viacom Class B Sept. 7 closing price. The premium over the Viacom Class A closing price is 17.6 percent, but market activity can shift the relative value.

Viacom owns all 144 million outstanding shares of Blockbuster Class B common stock. Subject to the satisfaction of certain conditions to ensure the tax-free nature of the exchange offer, Viacom will convert 72 million shares of Blockbuster Class B Common Stock, on a one-for-one basis, into shares of Blockbuster Class A Common Stock prior to the completion of the exchange offer.

As a result of this conversion, the outstanding Blockbuster common stock after completion of the exchange offer will consist of approximately 60 percent Blockbuster Class A Common Stock and 40 percent Blockbuster Class B Common Stock. It is currently expected that, after the transaction is completed, the number of votes per share of Blockbuster Class B Common Stock will be reduced from five votes per share to two votes per share.

For the fourth time since the beginning of the month, Blockbuster hit a new 52-week low in midday trading today, after the exchange ratio was announced, slipping 45 cents to $7.45, while Viacom shares gained 63 cents to reach $35.23.

“As I look at it, there is a huge amount of volume in there. Five million shares today — and it is typically under a million,” analyst Dennis McAlpine said. “There was nothing unexpected with it. I'm not sure I understand why the stock is reacting.”

McAlpine also does not expect much unusual activity in the Blockbuster share price between now and the Oct. 5 exchange close.

“I would think that the majority of that stock is now being held by professional traders and they are going to do it regardless because they are not fundamental holders,” he said. “I think a lot of it is for the arbitrage.”

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