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Viacom Spinning Off Blockbuster

Amid pressure from Wall Street to jettison its Blockbuster Inc. chain of video stores, Viacom Inc. announced a plan Tuesday that would spin off the unit to shareholders on a tax-free basis.

In conjunction with its fourth-quarter earnings release, Viacom said its board of directors made the decision to split off its 81% interest in Blockbuster because it determined that the video-store chain would be better positioned completely independent of Viacom.

Viacom had been trying to sell off the unit -- which generated $400 million in free cash flow (cash flow after interest payments and capital expenditures are made) for the media giant in 2003 -- for years, but it apparently didn’t receive what it considered to be attractive offers.

While the company left the door open to an outright sale -- it said it would consider other alternatives -- most in the financial community had anticipated the exchange offer.

Uncertainties about Blockbuster’s future as video-rental revenue has declined over the years forced many Wall Street analysts and investors to put the pressure on for a sale.

Viacom had sold about 15% of its Blockbuster interest to the public in 1999, and it told investors it planned to sell the rest within a year. But the decline in the stock market and a desire by president and chief operating officer Mel Karmazin to keep the unit and its free cash flow put off those plans.

Viacom did not release the terms of the exchange offer, but it said it would likely involve Viacom shareholders exchanging some of their Viacom stock for Blockbuster shares. The company said it hoped to complete the exchange in mid-2004 and it would likely result in a reduction in the number of outstanding Viacom shares.

On a conference call with analysts discussing fourth-quarter results, chairman Sumner Redstone said the decision to split off Blockbuster was a difficult one.

"We continue to believe in Blockbuster’s long-term prospects, despite relentless, consistently overblown and always erroneous predictions of Blockbuster’s demise," Redstone said on the call.

"The fact is, Blockbuster remains the No. 1 brand in home entertainment," he added. "But the business is evolving and moving away from our core areas of focus. Blockbuster will be far better positioned as an independent company."

For the quarter, revenue increased 11% at Viacom, fueled mainly by strong growth in its cable networks.

Cable-network revenue rose 24% to $1.7 billion and operating income before depreciation and amortization increased 18% to $685.9 million.

Viacom stock rose 96 cents each to $41.35 per share Tuesday.