Icahn Puts Netflix on Block With Bet Rivals Buy Not Build

Icahn Acquires 10% of Netflix, Mulls Ways to Maximize Value
Netflix Inc. has turned its original DVD-by-mail rental service into the dominant paid service for watching movies and TV shows online, becoming an important revenue source for Hollywood studios. Photographer: Scott Eells/Bloomberg

Billionaire Carl Icahn took a 10 percent stake in Netflix Inc., putting the world’s largest video-streaming service in play and signaling a potential end to its days as an independent company.

The 76-year-old investor disclosed a $168.9 million bet on Netflix yesterday, buying stock and options representing 5.54 million shares. The Los Gatos, California-based company posted its biggest gain since January after Icahn said deep-pocketed competitors such as Amazon.com Inc. and Verizon Communications Inc. were potential suitors.

Netflix has been the most aggressive player in the market for online video, building a subscriber base of 25.1 million U.S. customers and almost 5 million internationally. Its dominant position marks the company as the biggest prize in a business Icahn sees as ripe for consolidation. As consumers turn to the Internet for TV shows and movies, rivals must spend billions to overtake Netflix, or pay to acquire it.

“This could be a great jumping off point for them,” Icahn said in an interview on Bloomberg Television. “There’s so many possible combinations.”

Netflix surged 14 percent to $79.24 yesterday, the highest close in more than three months. It was the biggest advance since Jan. 26, pushing the stock to a gain for the year. Today the shares fell 2 percent to $77.69 at the close in New York.

Icahn’s investment includes options for 4.29 million shares, according to the filing.

‘Many Shareholders’

“We have many shareholders, now including Mr. Icahn, and we’re always open to their perspective on how to build on our success,” Jonathan Friedland, a Netflix spokesman, said today in an e-mailed statement.

Robert Varettoni, a spokesman for New York-based Verizon, declined to comment on whether the telecommunications company is interested in Netflix. Drew Herdener, an Amazon spokesman in Seattle, didn’t respond to a telephone request for comment.

Netflix is far ahead of its rivals. The company turned its DVD-by-mail service into the top subscription streaming destination for movies and TV shows, with a $7.99 monthly fee for unlimited use, doling out billions for rights to films and television shows.

Hulu LLC, owned by News Corp., Walt Disney Co. and Comcast Corp., said last month it had 2 million paid users to its Hulu Plus service.

Amazon, the world’s biggest online retailer, ties its video subscription to the $79-a-year Prime service, which offers free shipping. Prime had 3 million to 5 million customers in October 2011, with a goal to reach as many as 10 million by October 2013, people familiar with the matter said in February. In September, it added movies from Viacom Inc.’s Paramount Pictures, Metro-Goldwyn-Mayer and Lions Gate Entertainment Corp. in a deal with the Epix pay-TV channel.

Redbox Instant

Verizon and Bellevue, Washington-based Coinstar Inc., owner of the Redbox video kiosks, plan to start their Redbox Instant service year-end. The venture will combine subscription streaming, video-on-demand and the sale of digital copies with access to Redbox DVD rental machines.

Icahn, an activist who has pressed for buyouts and management changes at some companies he held stakes in, praised Netflix Chief Executive Officer Reed Hastings for expanding internationally and developing original series. In a filing, Icahn said the company may have appeal to larger buyers.

“I think Reed Hastings is a smart guy,” said Icahn, who had invested in the competing Blockbuster video-rental store.

Icahn probably isn’t seeking a change in Netflix’s direction, said Daniel Ernst, an analyst with Hudson Square Research in New York.

Like Icahn

Buying Netflix shares, which crossed $300 in July 2011, at less than $60 could make Icahn a winner whether or not a buyer emerges, Ernst said. The investor hasn’t publicly agitated for change at video-game maker Take-Two Interactive Software Inc., where he is the second-largest shareholder with 7.9 percent.

“If you’re someone like Icahn, who doesn’t need to listen to markets, that probably means it sounds like a good strategy,” said Ernst, who rates Netflix a “buy.” “He also probably thinks another strategic buyer might like it, too.”

The investor has made several large bets in media. At Lions Gate, Icahn sought to win control of the independent film and TV studio, selling his stake when he failed to win seats on the board.

Icahn was also the largest shareholder at MGM Holdings Inc., the parent for the Metro-Goldwyn-Mayer film studio, before agreeing in August to sell some 17.6 million shares back to the company for about $590 million.

Buyer Beware

Last year, Icahn returned all of the money he managed on behalf of outside investors, citing concerns about the economy and unrest in the Middle East. The hedge funds had about $5.4 billion of assets as of June 30, consisting of money invested on behalf of Icahn and his publicly traded holding company.

A buyer for Netflix would face numerous challenges. Domestic subscriber growth is slowing, the company is losing money from its international expansion and it has at least $5 billion in content obligations, including $2.1 billion over the next 12 months, according to its Oct. 23 third quarter report.

Those multiyear commitments would make it difficult to cut costs, said Eric Wold, a B. Riley & Co. analyst in San Francisco who recommends selling the stock.

“You are getting a significant subscriber base, but subscribers can cancel at any time without a penalty, so there’s no long-term security there,” Wold said. “They have content, but 80 percent is not exclusive, so you can get the content from someone else at a cheaper price.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE