NEW YORK -- Viacom chairman Sumner Redstone confirmed Wednesday that the entertainment conglomerate would sell the bulk of its Simon & Schuster publishing business in the next six months in a deal that will likely fetch between $3 billion and $4 billion.
But despite hopes from some investors, Redstone gave no indication of when Viacom might spin off its troubled Blockbuster video rental unit, although he said "we are on the right track" toward turning the unit around.
In a highly anticipated speech to the Salomon Smith Barney media investment conference in La Quinta, Redstone announced that Viacom will sell its educational, professional and reference publishing businesses, which Viacom execs said account for more than 85% of Simon & Schuster's earnings.
The division had earnings before interest, taxes, depreciation and amortization (cash flow) of $365 million in 1996.
Redstone said the money raised from the sale would be used to reduce Viacom's debt, which stood at $8 billion at year end. As a result Viacom's balance sheet would "dramatically improve," he said, allowing Viacom to generate "excess cash flow that can ultimately be used to further significantly reduce debt."
The company will keep its consumer publishing unit, which include the Simon & Schuster, Pocket Books, Scribner and Free Press consumer imprints. Redstone said this part of the business was being retained because it "is like our entertainment business, all about creative content packaged well and marketed smartly."
But investment bankers said Viacom may have also decided that it would be tough to sell the consumer books division because the consumer publishing sector has been hurt in the past couple of years by declining hardcover sales, leading to big losses on advances paid to high-profile authors.
Bankers said there were no obvious buyers for this part of the business. Indeed, News Corp. tried to sell its HarperCollins consumer publishing group last year without success.
Redstone denied the sector's troubles influenced Viacom's decision to keep the business. While conceding that others in the industry were having problems, he said Simon & Schuster's consumer division "made a tremendous amount of money" last year, although he said it contributed only a "relatively modest" portion of the total publishing profit.
Redstone's announcement about Simon & Schuster had been increasingly anticipated over the past month, fueled by hints from Viacom deputy chairman Tom Dooley at the PaineWebber conference last month that the company was thinking about divesting at least part of its publishing division (Daily Variety, Dec. 15). Viacom stock, which had risen 30% in the past month, fell 43¢ to $43.37 Wednesday.
Redstone said the decision to sell the bulk of Simon & Schuster, which comes after years of refusal by Viacom to even consider the idea, was "one of the most difficult decisions" Viacom had made.
"But the harsh reality is that the real value of these businesses is not recognized within Viacom -- it never has been, and that value has certainly not been reflected in Viacom's stock price," Redstone said.
As reported (Daily Variety, Jan. 7), Viacom has retained Wall Street bank Morgan Stanley to handle the sale. Redstone said that speculation about a possible sale had already prompted a "staggering" level of interest from potential buyers.
"We are getting indications from financial buyers, from people in (publishing)," he said.
Redstone declined to comment on analyst estimates of the price that Viacom could raise, but he said the interest shown so far makes the company confident that "we would get a very good price." Viacom said the deal would be done by the end of the second quarter.
Bankers said Viacom should get at least 10 times cash flow for the business, which puts a price of $3.1 billion based on the 1996 cash flow. For the first nine months of 1997, Viacom's publishing cash flow was down 5% but the fourth-quarter result hasn't yet been reported.
Viacom has been pressed for some time by major investors to sell the publishing unit, so Redstone's announcement will likely please many on Wall Street, who believe publishing doesn't fit with the entertainment business. Investors also want Viacom to spin off its troubled Blockbuster video rental unit, however, and analysts said Wall Street will be disappointed Redstone gave no indication in his speech of when such a spinoff might occur.
Instead Redstone told the conference that "we are not about to declare victory" in efforts to overhaul Blockbuster, "but we have an increasing level of conviction that we will indeed turn Blockbuster around beginning in the second quarter."
He went on to say that "the new Viacom," after the sale of Simon & Schuster, "will include a re-engineered and healthy Blockbuster." But speaking after his speech, Redstone said a spinoff had not been ruled out but was simply on the back burner until the business had been turned around.
"I have a mission and that is to turn Blockbuster around ... We will make it a hell of a lot more valuable than it was last year," when the extent of its problems became clear and its earnings dropped sharply, he said in an interview.
Outlining various measures taken so far to turn around the chain's business, Redstone said Blockbuster's market share was 24% today and "our goal is to increase that share significantly in the next two years."
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