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Trick or Treat: Icahn Buys 10% Stake in Netflix

31 Oct, 2012 By: Erik Gruenwedel

Carl Icahn

Calling the company undervalued, maverick investor Carl Icahn has  acquired a 10% stake in Netflix, according to an Oct. 31 regulatory filing.

Icahn purchased more than 5.5 million shares representing 9.98% of the Los Gatos, Calif.-based subscription video-on-demand pioneer.

News of the stock purchase sent Netflix’s shares up more than 13% in midday trading and negated the company’s morning disclosure that it had erroneously under-reported by 334% third-quarter content costs associated with expansion of SVOD service in Latin America, the United Kingdom and Ireland.

While Icahn’s investment represents a boost in the minds of many Netflix investors, it also could prove a double-edged sword for CEO Reed Hastings and senior management considering Icahn’s controversial history in home entertainment and track record of meddling in management of companies he owns stock in.

The New York-based investor was once the largest individual shareholder in Lionsgate — a position he used over several years to unsuccessfully leverage control of the mini-major. Icahn then dumped his shares just before Lionsgate scored at the box office and home entertainment by acquiring "Twilight Saga" studio Summit Entertainment and the separate release of The Hunger Games.

The hasty selloff reportedly cost Icahn more than $350 million.

Icahn also held a seat on Blockbuster’s board of directors, which he used to clash publicly with the rental chain’s former CEO John Antioco over the direction of the company. Years later, Blockbuster was acquired out of bankruptcy by Dish Network — but not before Icahn had salvaged much of his initial investment.

Icahn told Bloomberg TV that typically the best profitability in a company can be found when its market is experiencing a secular change as is happening in home entertainment, which is slowly transitioning from a disc-based business to digital distribution.

"With the advent of tablets and Internet-connected TVs, nobody has a better platform than Netflix to take advantage of it," Icahn said. "I think it is self-evident."

He said he didn't understand criticism of Netflix's $5 billion content obligations considering the service is actually only spending $2 billion a year on content, at a time when fewer people are going out to see movies.

"I'm a movie buff and I used to go once a week and I haven't been in a movie theater now in months because it's not a great experience anymore," Icahn said. "And I think Netflix is going to make more of these [original] shows. The world has changed. The film libraries aren't as important anymore. What I think is important is the subscription [VOD business] model. And I think Netflix is in the forefront of that model."

Eric Wold, analyst with B. Riley & Co. in Los Angeles, said Icahn's value as a Netflix shareholder depends on what his intentions are.

"I find it difficult to understand the rationale to acquire Netflix given that its large subscriber base can cancel at any time with no penalty and only 20% of their content is exclusive," Wold said in an email.

The analyst said Netflix has $5 billion in content liabilities, with challenges of stabilizing domestic streaming operations and turning profitable in international markets. He said the acquisition could be a powerhouse move if Icahn has the patience and faith in current management, i.e. CEO Hastings.

"Bear in mind that Icahn also took a controlling stake in Blockbuster at $10 per share and left the board five years later when the shares were at $0.50," Wold said.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, believes Icahn's emergence does not bode well for Netflix's management.

Icahn told Bloomberg Television Oct. 31 Netflix represents the pillar of a consolidated SVOD market, whose players (and potential suitors) include Amazon, Google, Microsoft and Verizon.

"I cannot see how his involvement makes a sale any more likely, and completely disagree with him about the variety of strategic buyers," Pachter said. "The only one that makes any sense to me at all is Amazon, and that is solely because they decided to get into the business in the first place. They don’t need Icahn to tell them that Netflix is in the same business and that it’s a bargain."


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