Hollywood’s short-lived love affair with multimedia software is drawing to a close at Virgin Interactive.
In coming months, the interactive game and software publisher is set to be split off from L.A.-based Spelling Entertainment Group Inc., part of giant Viacom Inc. But an originally planned initial public offering is all but off for the money-losing Virgin, which counted $254 million in sales last year.
Sources close to a possible deal said Virgin instead is being shopped around, and potential buyers include some giants of the software industry.
“There clearly are companies in the industry who are bidding,” said one source. “Look for something to happen by the end of the year.”
A sale might not bode well for Virgin’s Irvine headquarters, sources said, because a consolidation of jobs likely would ensue. Already in the past year, Virgin has cut 55 positions from its 175-person headquarters.
Possible suitors for Virgin include Japan’s Sega Enterprises Ltd., Alameda-based Spectrum HoloByte Inc., New York-based GT Interactive Software Corp. and Stamford, Conn.-based CUC International Inc., which oversees a large software division out of offices in Torrance. Even Microsoft Corp. has been mentioned as a possible buyer.
However, sources close to a deal said Electronics Arts Inc. has emerged as the likeliest buyer. The San Mateo-based giant, with $625 million in sales, publishes the popular “Warcraft II,” “Wing Commander” and “Madden NFL” games.
“Electronics Arts is the primary candidate,” said James L. Lin of Wedbush Morgan Securities in Los Angeles. “They like to acquire companies with established brands and franchises.”
In July, Electronics Arts acquired Walnut Creek-based Maxis Inc., the producer of the popular “SimCity” and other simulation games, for $125 million.
A spokeswoman for Electronics Arts declined to comment on a possible acquisition of Virgin. Spelling spokeswoman Nancy L. Bushkin said only that Spelling is on track with its divestiture of Virgin.
Calls to Virgin Chairman Martin Alper, who founded the company as Britain’s Mastertronics Ltd. in 1983, were not returned.
Spelling announced plans in February to sell its 90 percent stake in Virgin in order to focus on television and films. The shift is part of a larger exit from the interactive software business by Viacom, which owns 80 percent of Spelling. Earlier this year, Viacom announced plans to sell off game developer Rabid Entertainment.
Spelling’s original plan, a Virgin IPO, has been shelved, sources said. Despite growing sales and two of this year’s top 20 titles, Virgin’s likely reception on Wall Street is questionable; the company posted a $104 million operating loss last year when it had just a handful of hit releases against expensive development costs.
“An IPO is unlikely based on the current market,” said one analyst.
Observers said there has been talk of a management buyout of Virgin in recent months, but call that unlikely. Spelling, which took a $139 million charge related to Virgin last year, is looking to unload a division that it already accounts for as a discontinued operation.
“Electronics Arts naturally would be interested,” said Johnny Wilson, editor of Computer Gaming World magazine. “With Virgin’s distribution in Europe, and EA’s already strong European distribution, it would put them in control of more than 30 percent of the market there. It would be an unbeatable combination.”
As of June 30, Electronics Arts had $220 million in cash and short-term investments. Some observers said Virgin’s valuation has been put as high as $250 million, but another said he doesn’t expect anyone to pay a premium for the company.
“It will be a lower valuation than people think,” he said.
Beyond worldwide distribution and name recognition, Virgin’s other selling point is Westwood Studios, the company’s Las Vegas development subsidiary.
Westwood is responsible for “Command & Conquer: Red Alert,” the nation’s fourth highest-selling game title this year, according to Reston, Va.-based PC Data Inc.
Even with Westwood, Virgin like many computer game makers hasn’t been profitable because it doesn’t have enough hits to make up for huge production costs. With many games costing more than $1 million to make and taking as long as two years to produce, the average loss for a CD-ROM title is $88,000, according to Gary Gabelhouse of Lincoln, Neb.-based Fairfield Research Inc.
And unlike music or book publishers that can continue to sell older versions of their products, Virgin and other game publishers face the fact that their titles are soon rendered obsolete by faster, newer games.
Spelling’s sale of Virgin is the latest move in an overall entertainment industry retreat from the interactive software business. In April, for example, Walt Disney Co. laid off 90 of the 425 employees in its interactive division in a shift away from video game production. Downsizing and sell-offs also have played out at MGM Interactive and Time Warner Interactive.
“Entertainment companies bought high and now are selling low,” said game industry analyst David Cole of DFC Intelligence in San Diego.
Still, giants like Disney and Viacom aren’t exiting the industry altogether. Instead, they are licensing movie themes, characters and other properties to game publishers rather than taking equity stakes in the companies themselves.
