Billionaire Carl Icahn sold more than half of his stake in Netflix Inc., exposing a disagreement with his son Brett over the value of the stock.
Icahn sold 2.99 million shares of Los Gatos, California-based Netflix starting on Oct. 10, according to a regulatory filing yesterday. He continues to own 2.67 million shares, or a 4.5 percent stake.
The investor and his son outlined their differences in a statement. Icahn, 77, said the decision to sell was his, and it was time to collect profit, while Brett Icahn and fund co-manager David Schechter argued Netflix still has significant growth potential. The pair rewrote their contracts so the performance fee they receive from Carl Icahn will reflect subsequent gains or losses on the shares sold at his direction. Icahn said he only sold because the position became so big.
“I do not know if it is judicious to have one company with that large of a percent in the portfolio,” Icahn said in an interview with Bloomberg Television, citing his experience in seven bear markets. “I basically agree with their arguments, but I still did it.”
Icahn said in a statement yesterday that his Netflix investment cost about $58 a share and returned 457 percent, suggesting a gain of almost $800 million from the transactions, and an average selling price of about $323 a share.
Netflix rose 2.4 percent to $330.24 at the close in New York -- showing some investors side with Brett. The stock, which has more than tripled this year, reached as high as $389.16 in intraday trading yesterday, following better-than-expected third-quarter results on Oct. 21.
“There comes a time, when you are making 500 percent on your money, that you take your chips off the table. Some of them, anyway,” Icahn said in the interview.
Icahn’s sales included 2.4 million shares disposed of yesterday, according to the filing by a unit of his New York-based Icahn Enterprises LP. The younger Icahn, 34, and Schechter maintained that Netflix remains “significantly undervalued,” with the potential to add users and raise prices while controlling the cost of content.
“As a subscription service priced at only $7.99 per month, we believe Netflix is one of the great consumer bargains of our time,” they said in the statement. “Netflix is currently adding 6 million net subscriber additions per year.”
The pair said they expect Netflix’s international profit to exceed earnings in the U.S. as overseas markets mature, and they support spending to accelerate its global expansion
Schechter referred calls to Carl Icahn’s office.
The younger Icahn and Schechter revised an agreement with the senior Icahn to ensure they are compensated when disagreements arise over future sales of Netflix shares.
Any shares sold without the approval of the two managers will remain in the portfolio on a “notional” or theoretical basis, boosting their potential gains under a profit-sharing arrangement with Icahn Enterprises should Netflix’s market value continue to rise. Conversely, a decline in Netflix shares would reduce their ultimate payout.
Schechter and Brett Icahn described Netflix as representing “the pure life blood of a colossal secular growth category,” and praised Chief Executive Officer Reed Hastings for instilling “deserved confidence among the company’s investors by repeatedly exhibiting both vision and the ability to execute on that vision.”
The senior Icahn thanked Hastings, Chief Content Officer Ted Sarandos “and the rest of the Netflix team for a job well done. And last but not least, I wish to thank Kevin Spacey.” He then added: “I also want to thank David and Brett.”
The elder Icahn highlighted that their co-managed $4.8 billion Sargon portfolio, supervised by him, generated annualized returns of 37 percent.
Subscriber growth at Netflix’s streaming service is being driven by original shows such as the prison dramedy “Orange Is the New Black,” the company said this week. Netflix earlier debuted the first streaming-only original series “House of Cards,” starring Spacey.
Brett and Schechter, who have been running the $300 million Sargon portfolio since April 2010, were given as much as $3 billion last year to invest in companies with stock-market values of $750 million to $10 billion, as outlined in a 46-page legal agreement filed with U.S. regulators in March 2012.
Icahn hired Brett as an investment analyst more than a decade ago, while Schechter joined the firm in 2004 after working at a Citigroup Inc. unit that used the bank’s capital to invest in distressed companies.
The sales by Icahn could lead others to sell Netflix as well, according to Michael Pachter, an analyst at Wedbush Securities Inc. in Los Angeles, who has an underperform rating on the stock.
“It’s entirely appropriate for someone who’s up 500 percent to trim their position,” Pachter said.
Netflix, the world’s largest subscription streaming video service, reported third-quarter sales, profit and subscriber growth that exceeded analysts’ estimates.
The stock is the top performer in the Standard & Poor’s 500 Index this year behind Best Buy Co., with a gain of almost 250 percent through yesterday.