NEW YORK — Viacom Inc., the media conglomerate that owns MTV and CBS, is getting rid of its controlling stake in the Blockbuster video rental chain and taking a $1.3 billion charge to reflect the declining value of the business. The charge put Viacom well into the red for its latest fiscal quarter.
Ironically, the reason Viacom originally bought Blockbuster 10 years ago was for the large amounts of money it made, which Viacom needed at the time to finance its bid for Paramount in a heated takeover battle against rival suitor QVC.
Today, Blockbuster still makes money, but its revenues are declining and investors are worried about its prospects given that giant retailers like Wal-Mart Stores Inc. are flooding the market with cheap DVDs for sale. The video rental business is also facing challenges from emerging technologies like video-on-demand, personal recording devices like TiVo, and even the DVD rent-by-mail service offered by Netflix Inc.
Viacom has been considering what to do with its 81 percent stake in Blockbuster for some time, and apparently its efforts to find a buyer have failed. Now Viacom says it plans to divest the stake using a tax-free split-off transaction, under which Viacom shareholders would have the option of exchanging some of their stock for shares in Blockbuster.
In making its announcement about Blockbuster Tuesday, which coincided with its fourth-quarter earnings report, Viacom noted that the decision was not yet final, and it did not disclose details of the proposed transaction. Leaving the door open to potential bidders, the company said it would "continue to consider other alternatives."
Viacom took the $1.3 billion charge under an accounting rule that requires companies to occasionally assess the value of the goodwill of its businesses, or the amount above their current value that the company paid for them.
Including the Blockbuster charge, Viacom reported a net loss of $385.4 million in the fourth quarter, or 22 cents per share, compared with earnings of $652.4 million, or 37 cents per share, in the same period a year ago.
Revenues increased 11 percent to $7.52 billion from $6.78 billion.
In the earnings report, Viacom gave the latest indication of Blockbuster's struggles, reporting that same-store revenues fell 7 percent in the fourth quarter due to overall softness in the movie rental industry.
Sumner Redstone, Viacom's chairman and chief executive, told investors in a conference call that while the company continued to believe in Blockbuster's long-term prospects, "the business is evolving and moving away from our core areas of focus."
The retail nature of Blockbuster's business was always an anomaly within the Viacom media conglomerate, which is made up predominantly of advertising-driven business like TV and radio.
The announcement marked the second time that Viacom has said it would split off Blockbuster. Viacom floated shares in Blockbuster in 1999 and said it would divest the rest later, but the company later changed course, deciding to hold on to the business for the cash it generated.
Despite several marked turnarounds in its business — including a move to adapt from mainly videotape rentals to DVDs and games — Blockbuster's stock has struggled recently, trading not far above the level of $15 at which Viacom floated the shares five years ago.
Investors liked what they heard from Viacom, sending the company's widely traded class "B" shares up $1.12 to close at $41.10 on the New York Stock Exchange. Blockbuster's shares were off 21 cents to close at $16.20.