Blockbuster merger hopes dashed: Viacom's tumbling shares scupper plans for dollars 8bn entertainment giant

VIACOM, the US cable and entertainment giant, and Blockbuster Entertainment, the world's biggest video rental group, yesterday admitted that they have in effect abandoned plans for a dollars 8.4bn ( pounds 5.6bn) merger.

The deal was originally signed in the heat of Viacom's battle for Paramount Communications last winter. It has foundered because Viacom's share price has tumbled on worries about the dollars 10bn debt incurred to buy Paramount. So far Viacom and Blockbuster have been unable to agree on amended terms.

Blockbuster's chief executive, Wayne Huizenga, wrote to shareholders yesterday warning that the merger might not go forward. He pointed out that the dollars 1.25bn worth of Viacom shares purchased by Blockbuster in January as a preliminary step towards a merger are now worth a third of that amount.

However, the failure of the transaction could free Blockbuster to buy a dominant stake in Richard Branson's computer game company, Virgin Interactive Entertainment. VIE, in which Blockbuster already has a 20 per cent stake, had been due to float in April. Blockbuster approached it before the flotation details were finalised with a view to increasing its holding to about 45 per cent. PolyGram, the record group, was also interested in buying a stake, but Blockbuster was thought to be the preferred purchaser.

Any deal with Blockbuster would have been subject to Viacom's approval during the merger period. As Viacom needed Blockbuster's strong cash flow to repay its post- Paramount debts, this might not have been forthcoming.

Viacom and Blockbuster are to continue talks up to the merger deadline of 30 September in hopes of striking a new and less ambitious deal.

Viacom confirmed yesterday that face-saving measures, including a cable-TV joint venture and a merchandising arrangement involving Blockbuster's stores and Paramount film personalities, were under discussion.

The video chain, which also owns two smaller television and film production studios, would have been the third prong in Viacom's goal of becoming a leading player in the production and distribution of film entertainment. Already a major force in cinemas and cable-TV programming and distribution - it owns the MTV music channels and two pay-movie outlets in the US - it planned to harness the Paramount studio and Blockbuster's retail capacity to create a vertically integrated media giant.

The imminent collapse of the deal has forced Viacom to consider asset sales it had hoped to avoid.

Earlier this week, it confirmed it was in talks to sell Madison Square Garden, the New York sports arena owned by Paramount. The sale, which could bring in as much as dollars 1bn, would include the cable-TV sports channel that broadcasts from the Garden, and the two teams based there, the New York Rangers of the National Hockey League and the New York Knicks of the National Basketball Association.

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