Spelling goes on the sale block as Viacom moves to cut its debt load.

At a time when everybody seems to be buying media companies, Viacom Inc. has decided to sell one - putting its majority stake in Los Angeles-based Spelling Entertainment Group Inc. on the market.

Viacom officials said the move is designed to lower the company's substantial debt load.

Shortly after Viacom put its 78 percent slake in Spelling - valued at over $1 billion - on the block, Spelling announced substantially lower quarterly earnings.

Net income for the second quarter dove nearly 90 percent to $880,000, or 1 cent per share, from $8.7 million, or 13 cents per share, a year earlier. Revenues gained 61 percent to $135 million.

Spelling officials said the reason profits dropped while revenues grew was due largely to the company's acquisition of Republic Pictures Corp. and Virgin Interactive Entertainment Ltd., both of which were bought in the second half of 1994.

Virgin Interactive lost $4.3 million during the second quarter of 1995, Spelling officials said.

TV side up

Meanwhile, costs on the television programming side of Spelling were up, company officials said, because Spelling made five pilots for consideration by the networks, compared to only one pilot the previous year. Two of those pilots have been picked up as mid-season replacements.

"Overall, we remain very confident in the underlying long-term strengths in all of our business units," said Spelling President and CEO Steven R. Berrard. "We firmly believe prospective purchasers of the company will recognize the value of these businesses."

But the lower profits led some in the industry to question why Viacom hadn't decided to announce its intention to sell Spelling earlier - well before Spelling popped the bad earnings news.

"The timing of the sale announcement doesn't seem appropriate," said Christopher Borde, associate analyst for entertainment research firm Paul Kagan Associates, "because they are not selling at the company's peak."

Debt reduction plan

Officials for Viacom said the decision to sell Spelling, creator of television shows from "Charlie's Angels" to "Melrose Place," comes from the company's desire to pare its $10-billion debt.

"The substantial net proceeds we anticipate from the sale of Spelling will essentially complete the process of establishing Viacom as one of the world's most strongly capitalized global media companies," said Viacom Chairman Sumner M. Redstone.

And it is just that debt burden, industry insiders note, that could slow down Viacom's effort to transform itself into a global entertainment company of the future.

"The more they can reduce that debt, the better they can go out and actively compete with companies like Disney," said Mike Adler, entertainment attorney with the Century City law firm Mitchell, Silberberg & Knupp.

Viacom accrued much of its debt load through earlier acquisitions - in particular, Paramount Communications Inc. and Spelling's then-parent company Blockbuster Entertainment.

In recent months Viacom began shaving debt by selling such holdings as Madison Square Garden, an interest in the Lifetime cable TV network, and its cable television systems. Analysts estimate Spelling's sale could lower Viacora's debt to a more manageable $6 billion or $7 billion.

Since Spelling, which produces and distributes television shows, provides Viacom with relatively the same functions as other operations within both Viacom and Paramount, it makes sense to sell Spelling, freeing up funds to acquire entities in areas where Viacom isn't as strong, Adler said.

Buyers abound

But where Spelling failed to fit into Viacom's overall scheme, it could fit very well into the plans of others, industry sources noted.

Among the short list of potential suitors is Twentieth Century Fox, which has used Spelling-produced programs like "Beverly Hills 90210" and "Melrose Place" to strengthen its prime time line-up.

Columbia Pictures, for which Spelling produced hit shows in the 1970s like "The Love Boat" and "Charlie's Angels," could also have an eye on the company.

"And Universal Pictures would be a pretty good contender because they have a poor television division," said Borde, "and this would be a good way for them to catch up a lot of ground."

Others that might have an interest in Spelling, Borde said, include Turner Broadcasting System, which could stand to strengthen its non-movie-length television production capabilities, and Polygram NV, the Dutch company that is looking to get into the movie business.

In the meantime, Viacom announced it will purchase Spelling's interest in Virgin Interactive. Spelling, founded by prolific producer Aaron Spelling, also owns Republic Pictures. It thus has a library of 7,000 television shows and motion pictures, including "Bonanza" and "Terminator 2."