EXCLUSIVENEW YORK -- Spelling Entertainment is moving forward with its year-old plan to sell Virgin Interactive in an initial public offering, recently selecting three Wall Street firms led by JP Morgan to handle the offering's underwriting, sources said.
But plenty of uncertainties about the deal remain. The size of the expected offering has shrunk to $150 million since Spelling, itself a subsidiary of Viacom Inc., announced Feb. 20 last year its proposal to sell its 92% stake in Virgin in a public offering. The deal had been expected to raise as much as $250 million, Wall Streeters said.
It's not clear why the deal has come down in size, although Virgin's operating losses increased sharply last year, and analysts say the valuation of the company has likely come down as a result.
A Spelling spokeswoman confirmed the selection of JP Morgan as lead underwriter, but declined to comment on other details of the offering, including its possible size. Morgan's co-lead underwriter is understood to be UBS Securities, which advised Spelling on the feasibility of doing the IPO last year, while Salomon Smith Barney will also play a role in the deal, sources said.
While planning for the offering is now under way, Wall Streeters say it's not certain Spelling will go ahead with it. One of the reasons the deal has been delayed over the past year has been that Spelling had given investment banker Robert Greenhill the go-ahead to scout around for a possible buyer of Virgin, sources said, in the hope that a private sale would yield a higher price than a public offering.
Greenhill so far hasn't succeeded, but Spelling is believed to be hoping he may still pull off a private sale. Indeed, some on Wall Street think the move to hire the underwriters was designed to pressure potential buyers into doing a deal, or as a way to pinpoint the market value of Virgin. Greenhill did not return calls seeking comment.
Spelling needs to get something done quickly, however. After announcing its intention to take Virgin public, Spelling took a one-time charge of $139 million on its investment in the unit against 1996 earnings and accounted Virgin as a "discontinued operation" -- separating Virgin's results from Spelling's 1997 quarterly earnings.
But Spelling can't do this indefinitely. Accounting rules require that a company reporting the earnings from one of its subsidiaries as a "discontinued operation" have a detailed plan under way to dispose of the operation within one year. That deadline is now imminent. pelling could conceivably have to restate its earnings to include Virgin if it doesn't finalize a sale shortly, some Wall Streeters say. Spelling declined comment.
Having to restate earnings to include Virgin could have an impact on Spelling's reported results. For the first nine months of 1997, Virgin's operating losses jumped from $27.4 million to $49.4 million, Spelling said in an SEC filing (the fourth quarter earnings have not yet been released).
While this enlarged nine-month loss was covered by Spelling's $139 million one-time charge, that write-down was taken against Spelling's 1996 earnings, so a restatement conceivably could affect the 1997 result.
More importantly, Spelling would have to start reporting Virgin as part of the company again for this year, which could hurt Spelling's 1998 earnings.
Another issue affecting the timing of an initial public offering is Virgin's management. The company currently doesn't have a CEO.
Spelling stock closed unchanged Wednesday at $8.50.
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