Icahn's Blockbuster Move: So Far, a Bust

The activist investor has seen the movie-rental chain go from troubled to worse, and now its viability is in doubt

You can only hope Carl Icahn loves a good slasher movie. He's starring in one of his very own, financially speaking, when it comes to his investment in Blockbuster (BBI). The nationwide chain of movie-rental stores said in an Apr. 6 regulatory filing that its auditors had slapped it with a dreaded "going concern" designation—that it "may not have sufficient liquidity to finance the ongoing obligations of our business."

That's not exactly the outcome Icahn was hoping for in 2005 when he waged a successful battle to get himself and two others on the Blockbuster board. At the time, Icahn railed against the pay package for then-CEO John Antioco, argued for a one-time dividend, and even suggested that Blockbuster put itself up for sale. His agitation eventually contributed to Antioco's departure, but has failed to protect him—or other shareholders, for that matter—from some considerable losses.

It's hard to tell exactly how much Icahn has lost in Blockbuster, but it appears that he dropped $153 million on his investment in the Dallas-based company's Class A shares. Even before the current retail rout, Blockbuster was struggling to find its footing in an industry where competitors such as mail-order DVD rental outfit Netflix (NFLX) were stealing business. In all, Icahn controls an estimated 16% of the company's Class A shares and another 7.7% of its B shares. For the B shares, Icahn appears to have spent more than $170 million. Reached by BusinessWeek, Icahn would not discuss his investment or Blockbuster's prospects.

But the debacle reflects the mixed track record for Icahn as both an activist shareholder and billionaire investor. Icahn has tilted at the boards of companies including biotech maker ImClone and oil company Kerr-McGee, winning big when each was eventually sold—ImClone to Eli Lilly (LLY) and Kerr-McGee to Anadarko Petroleum (APC). But the concessions he won in a bruising battle with cell-phone maker Motorola (MOT)—which include board seats for two Icahn associates and an agreement to consult with Icahn on possibly splitting the company in two—have done little to reverse the company's sliding fortunes. And after winning three board seats at Yahoo! (YHOO), Icahn was unsuccessful in pressing the Web portal into a takeover by Microsoft (MSFT).

Early Disappointment at Blockbuster

So far, Icahn's investment in Blockbuster is a bust, too. When he came calling in 2005, Icahn said in a filing that he saw a consolidation play. He figured Blockbuster would gain market share and profitability if it were successful in its then-contemplated acquisition of Hollywood Entertainment, the second-largest video chain in the country. (Icahn also held a stake in Hollywood, so he saw a quick buck there as well.) Blockbuster unsuccessfully tendered for Hollywood, which was ultimately snapped up by a third player, Movie Gallery.

Icahn could have gone away in 2005, of course, but by then was so deep into Blockbuster stock that he launched a proxy battle that turned into a nasty one-on-one fight with Antioco. Icahn publicly told Antioco that he had mishandled the Hollywood takeover and should issue a one-time dividend to shareholders. At one point, Icahn interrupted a conference call that the executive was holding with analysts to pepper him with questions.

Despite the uneasy truce that existed after the proxy fight, the two men never got along after that, and Icahn helped to ease the CEO out of his job in 2007. Icahn, who as a board member objected to the CEO's pay package, saw to it that Antioco's bonus package got slashed as he headed out the door. Antioco got almost $8 million in bonus and a lump sum payment for leaving early; the outgoing executive's contract had called for more than $21 million.

Since Icahn joined the board, the company has reported nearly $1.1 billion in losses, including $374 million in 2008, as its revenues have slid to $5.3 billion a year from $5.7 billion. Now, Blockbuster faces some daunting prospects. Under a new CEO, former 7-Eleven chief James Keyes, the company has beefed up its mail-order business to compete with Netflix. Blockbuster also bought Movielink, a movie-download service launched by major Hollywood studios, and rechristened it Blockbuster.com. Even so, the company says that last year its mail-order rental business dropped by $60 million, or 26%, while its in-store sales slumped by another 3.2% as it shuttered unprofitable stores.

Questionable Bid for Circuit City

And what's Icahn been up to? In a head-scratcher of a move, the dealmaker agreed with Blockbuster management to try to buy now-bankrupt (and liquidated) electronics retailer Circuit City in early 2008. To get the deal done, at one point, Icahn told a reluctant Circuit City management that he would bankroll the entire deal, if needed. The deal's rationale? Blockbuster said it wanted to jump on the "convergence" bandwagon, as more and more electronic devices were now being equipped to download movies and TV shows from the Internet. Eventually Circuit City turned down the deal, saying it was uncertain that Icahn and Blockbuster would finance their bid.

The reasoning behind a Blockbuster-Circuit City merger, when both were struggling, was always hard to swallow. Just as hard to fathom is why Icahn thought the money-losing movie-rental business would magically find a way to reverse course and gain market share after years of losing out to Netflix, DVRs that record movies from TV, and the cheaper DVDs being sold by Wal-Mart (WMT). More recently, Icahn has made a bid for board seats at Hollywood studio Lions Gate Entertainment (LGF). Some in the film industry think he may try to merge the studio, which has a rich library of older movies and TV shows, with the video chain.

So far, Lionsgate has demurred. Maybe the deal has merit. For now, it marks another suspenseful turn in what, for Blockbuster investors, remains one frightful flick.

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