Call It Blockbummer

When do you know a relationship is over? For Viacom Inc. and Blockbuster Entertainment Corp., one telling moment came at an Apr. 26 board meeting. The $4.7 billion merger of the two companies has been in trouble ever since Viacom prevailed in its epic battle for Paramount Communications Inc. But instead of working to salvage the deal, Viacom directors and Blockbuster Chairman H. Wayne Huizenga focused on how best to consolidate Paramount, say sources familiar with the meeting--with Huizenga acting more like an interested investor than a decisive player.

Indeed, people close to Viacom say Chairman Sumner M. Redstone is already planning for life without Blockbuster and its rich cash flow. To pay down the heavy debt from Paramount, he may end up selling a few more assets than he had first planned.

Huizenga, though, could find himself in a quandary of a different sort. "He put himself up for sale," says John Tinker, a media analyst at Furman Selz Inc. "The onus will be on him to prove that his business is still worth a lot."

LOST DREAM? By selling out to Viacom, say media experts, Huizenga implicitly acknowledged that his core home-video business will someday be supplanted by movies on demand. Many observers had praised the merger as the capstone in Huizenga's strategy of diversification--transforming the Fort Lauderdale (Fla.) video giant into a well-rounded media empire. Now, though, Blockbuster may be left with videos, some other businesses, and a costly investment in Viacom. "We're doing a lot of good things even though we're in limbo," says Huizenga. "Business is great, but [on Viacom] there's nothing to report."

The trouble is, Blockbuster shareholders can't get past the Viacom investment. Huizenga purchased $1.8 billion of Viacom preferred and common stock to help Redstone vanquish QVC Network Inc.'s Barry Diller in the bidding war for Paramount. But Viacom doesn't have to return the money, even if the Blockbuster deal founders. Worse, Viacom's Class B stock has tumbled from $41 to $23 since Huizenga bought in. Because Blockbuster paid $55 per share, the company's loss currently stands at $728 million. "We paid a dear price," concedes one Blockbuster insider, "but it's an investment in a business we like."

Wall Street doesn't share the enthusiasm. Blockbuster shares fell from $30 to $25 after it announced the merger on Jan. 7. And even the widespread belief that the deal is dead--fueled by news that Blockbuster won't put it up for a vote at its May 24 annual meeting--hasn't revived the shares. Instead, stockholders are worried about how much Blockbuster may lose on its Viacom investment.

According to the merger agreement, Viacom will compensate Blockbuster if the deal is called off and Viacom stock is still trading below $55 a year from now: The company can either pay up to $275 million in cash or securities, or it can sell Paramount's regional theme parks to Blockbuster for $750 million, payable in Viacom shares. The parks would dovetail nicely with Blockbuster's plans to build its own 2,400-acre entertainment and sports complex in south Florida. But Redstone may not want to part with them. Either way, the compensation could fall far short of Blockbuster's investment.

Nor are shareholders likely to be consoled that Blockbuster is pursuing joint ventures with Viacom, such as selling Nickelodeon magazine in Blockbuster's stores. "If you want milk, you don't have to buy the cow," says Larry Haverty, vice-president of State Street Research & Management, which owns 2.4 million shares.

EARNINGS UP. Still, as Haverty and others point out, Huizenga is not without options. Technical glitches in Time Warner's Orlando cable network underscore the fact that conventional video rental has more of a future than previously feared. Indeed, Blockbuster's earnings jumped 62% in the first quarter of 1994, to $72.6 million from $44.7 million, on revenues of $696.5 million. What's more, other companies, including Walt Disney Co., have expressed interest in Blockbuster.

But unless Huizenga pulls off another deal, he'll continue to battle a perception that Blockbuster is locked in a sunset industry. Huizenga has been diversifying steadily--purchasing stakes in a small Hollywood studio and a chain of music stores. And he insists he has 10 years or more to wean Blockbuster off videos. Without a Viacom merger, though, the years may pass more quickly than he thinks.