Tower Records tumbles; Viacom spins off Blockbuster - planning and restucturing; Blockbuster Entertainment Group

DSN Retailing Today, Feb 23, 2004 by Doug Desjardins

WEST SACRAMENTO, CALIF. -- The entertainment retail industry was dealt a one-two punch this month when Tower Records filed for Chapter 11 Bankruptcy protection and Viacom announced plans to spin off Blockbuster Entertainment. While neither announcement came as a big surprise, both underscore the uncertain future that music and video retailers face in a changing world.

Tower's parent company, MTS Inc., filed for reorganization Feb. 9 in U.S. Bankruptcy Court in Delaware. The company had been trying to find a buyer for Tower since defaulting on a $5.2 million loan payment in 2003, but could not find any takers. In a prepared statement, Tower ceo Allen Rodriguez said stores would continue to operate as usual and that Tower expects to emerge from bankruptcy within 60 days.

"Court approval of the prepackaged plan will reduce existing debt by $80 million, eliminating the financial risks that have faced Tower for the past three years," said Rodriguez. According to Tower's filing, its list of creditors is headed by Universal Music & Video with $15.6 million, followed by $13.6 million with WEA Distribution and Sony Music Entertainment with $7.1 million.

Under terms of the plan, the 93-store retailer would exchange more than $100 million in debt to its creditors for $30 million and an 85% ownership stake in the company. The remaining 15% would be held by existing shareholders including Tower founder Russell Solomon.

Like many music retailers, Tower has suffered a sharp decline in CD sales the past four years. Sales of VHS and DVD have also dropped due to pressure from big rivals such as Wal-Mart and Target.

"Music downloads and the Best Buys and Wal-Marts of the world have changed everything," said retail analyst George Whalin. "Trying to get people to go into a store just to buy music or movies is not the best business model to have at this point in time."

Blockbuster is facing the same challenge as more consumers choose to buy movies on DVD and rent from alternative sources. Viacom Inc. on Feb. 10 said it plans to spin off its 81% interest in Blockbuster to shareholders by mid-2004 after searching in vain for a buyer.

The announcement came after Blockbuster posted a 6% decline in fourth quarter same-store sales. Blockbuster also reported a fourth quarter loss of $385 million, but that was due mainly to $1.3 billion in accounting charges to write down goodwill and other assets. Without the charge, it would have posted earnings of $630 million.

Blockbuster ceo John Antioco didn't seem disturbed by the proposed spin-off. "We believe Blockbuster will compete very effectively as an independent company and that separation from Viacom will allow us to pursue our unique strategic vision," said Antioco in a statement issued after the announcement.

But the troubling drop in same-store sales could mark the start of video rental's slow demise. Forrester Research predicts rentals will fall steadily the next few years from $10.2 billion in 2003 to $8.1 billion by 2007. At the same time, video sales will continue to rise as customers opt to buy movies on DVD rather than rent.

While Blockbuster has managed to grab a larger share of video sales in recent years by emphasizing sales in stores, it may not be enough to offset the expected decline in rentals. New rivals like Netflix, the online rental service that now has 1.5 million subscribers, are also chipping away at Blockbuster's core business.

Other entertainment retailers are also showing signs of strain. Music and video retailer Wherehouse Entertainment filed for Chapter 11 Bankruptcy last year and has since closed more than 30 stores.