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Blockbuster Bid by Carl Icahn Looks Like a Loser, Analysts Say

Billionaire Investor Carl Icahn
Carl Icahn, billionaire investor and chairman of Icahn Enterprises LP. Photographer: Rick Maiman/Bloomberg

A second bet on Blockbuster Inc., the bankrupt movie-rental company, by billionaire Carl Icahn is starting to look like a loser, analysts said.

Icahn and Monarch Alternative Capital LP are among Blockbuster creditors who are considering a bid for the company at less than $300 million, a person familiar with the matter said. If they bought it, they would be gambling on whether the company can be sold, or remade as a second Netflix Inc., at a time when at least one supplier, Summit Distribution LLC, says Blockbuster can’t pay its DVD bills and should be liquidated.

“If these guys are delusional, they might think they can compete with Netflix,” said Michael Pachter, a managing director of research at Wedbush Securities Inc. in Los Angeles. More likely, the idea of a sale has been revived because some creditors “aren’t willing to give them any more money,” he said. “They’re trying to salvage what they can.”

Martin Sosland, a lawyer for Dallas-based Blockbuster, declined to comment on whether the company might be sold or at what price. Icahn and Michael Weinstock, managing principal at New York-based Monarch, didn’t return calls seeking comment.

Blockbuster can’t pay $1.6 million owed for DVDs of “The Twilight Saga: Eclipse” and other bills, Summit said this month. That will make other suppliers wary, and Blockbuster will have trouble getting more money for advertising, Pachter said.

“You’d need $30 million in annual profit to justify a price of $300 million,” he said.

Blockbuster posted a net loss of $53.5 million on sales of $736.6 million in the third quarter of 2010.

2005 Proxy Fight

The 74-year-old Icahn led a 2005 proxy fight that put him on Blockbuster’s board as the company’s largest shareholder, when shares were worth about $10. He resigned five years later and in March 2010 sold most of his 16.9 percent common-share stake, according to a regulatory filing. By then, shares were trading at less than 50 cents.

Before Blockbuster’s September bankruptcy filing he spent about $100 million to buy about a third of the company’s senior bonds at less than 50 cents on the dollar, putting up more money toward a $175 million loan intended to adapt the storefront business into an online video service, said the person familiar with the matter.

Blockbuster plans to close 110 underperforming stores by the end of this quarter, according to court papers. Four years ago, Icahn said the future lies with bricks and mortar.

‘Our Greatest Assets’

“In the online battle with Netflix, our stores have become one of our greatest assets,” he told Time magazine in a 2007 interview.

“We tell the consumer, ‘Subscribe to Blockbuster online because if you don’t feel like waiting for the mail, you can run down to the store with your old movie, and we’ll give you a new one for free,’” he said. “We’re up to 2.2 million subscribers.”

Blockbuster is a special challenge for its creditors because it needs to do more than cut debt and close stores, said Richard Dorfman, a media investor and managing director at Richard Alan Inc. in New York.

“It’s not a turnaround, it’s more of 180 degrees,” he said in a phone interview. “You’re saying a whole new business plan, a whole new set of skills, a whole new management team.”

“Icahn may not like the job,” he said. “Someone who takes the gamble has to be willing to get knee deep in this. He’s not an investor operator. He’s more of an investor agitator.”

Blockbuster entered bankruptcy with the outline of a reorganization plan supported by senior bondholders. The company’s deadline for filing a plan and a disclosure statement to explain it has been extended.

‘Anything But Insolvent’

“It’s hard to say this debtor is anything but insolvent,” U.S. Bankruptcy Judge Burton Lifland said last month at a hearing in Manhattan.

The company was founded in 1985, and grew to serve almost 47 million customers daily in the U.S. and 16 other countries. Viacom Inc., which owns the Paramount film studio, bought Blockbuster from Wayne Huizenga for $8.4 billion in 1994, then spun it off to shareholders in 2004.

Icahn, whose fortune was valued at $10.5 billion by Forbes magazine last year, made his name as a corporate raider in the 1980s targeting companies such as Phillips Petroleum Co. and Texaco Inc. He often holds stocks for years waiting for them to pay off.

The case is In re Blockbuster, 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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