Viacom Gets Blockbuster Payday

Before the split-off, Blockbuster plans to pay its $5-a-share "special cash distribution" of $905 million to all Blockbuster shareholders, implying a $167 million payout to shareholders other than Viacom.

With Blockbuster and Viacom already having mentioned the possibility of some sort of dividend, the $5 payout apparently fell in the range of what Wall Street had been expecting. Perhaps the dividend could have been as much as $7 per share, said one buy-sider, speaking on condition of anonymity. On the other hand, "This is pretty good," said the buy-sider, whose firm has holdings in Viacom and Blockbuster.

Though Fulcrum Global Partners analyst Richard Greenfield had himself expected a $6 to $7 dividend, he says the amount of the dividend was less important than the filing of the separation.

"Investors were worried VIAB would change their minds or try to sell BBI again, delaying its expulsion from VIAB," Greenfield wrote in a report issued Friday. "Now investors have clarity, and management is living up to what they said -- an important positive to shift the increasingly negative investor views of management and the company as a whole." Greenfield has a buy rating and a $42.50 price target on Viacom's stock.

The looming questions are now what Viacom might be buying and selling after this transaction, and how well equipped Blockbuster will be after the split-off and payout.

Blockbuster's shares fell 26 cents to $15.13 Friday, while Viacom's shares rose 57 cents to $37.23.

Blockbuster said it has received a financing commitment from JPMorgan, Citigroup and Credit Suisse First Boston for a new $1.45 billion credit facility, which will be used to finance the special distribution and replace Blockbuster's current revolving credit facility.

Blockbuster, which had $137 million in cash on hand at the end of March, reported free cash flow of $403 million last year, up 61% from the prior year.

"We believe that by becoming a separate company we will be better able to pursue our retailing strategy," Blockbuster CEO John Antioco said in a statement. "Additionally, we believe issuing a special cash distribution will offer value to our stockholders without inhibiting us from executing our business plan."

Viacom might deploy its payoff from the deal along several avenues. Redstone has previously said that the company plans to spend more freely at its movie studios. Viacom is also planning to launch a new gay-themed cable channel, called Logo. Redstone has also said he hopes to initiate a major stock buyback following the Blockbuster deal; Viacom's shares, which have stumbled over the past year, are down more than 20% from their 52-week high.

Another question mark for Viacom is whether it might divest itself of its radio business as well. The company's biggest champion of Infinity radio was Viacom President Mel Karmazin, whose resignation from the company was announced earlier this month. The radio industry hasn't shared in the recovery enjoyed by other advertising media of late, and this week numerous Wall Street analysts downgraded their outlook for the sector.