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Blockbuster Cliffhanger Not Over

19 May, 2005 By: Erik Gruenwedel

Executive machinations continued apace this week at Blockbuster Inc.

Despite a shareholder referendum — led by newly elected board member Carl Icahn — to make Blockbuster more financially accountable, the No. 1 video rental chain granted fiscal 2005 pay hikes of up to 18 percent to six executives the day before the May 11 board election.

Blockbuster said it awarded Nicolas Shepherd, president of U.S. store operations, an 18 percent raise of $87,596, to $565,000; EVP Chris Wyatt, a 10.4 percent increase of $61,327, to $649,543; and CFO Larry Zine and general counsel Edward Stead, 7.5 percent raises of $45,192 (to $640,000) and $39,327 (to $560,000), respectively, according to a filing with the Securities and Exchange Commission.

Chairman and CEO John Antioco, whose $7 million compensation in 2004 fueled Icahn's run for a board seat, did not receive a raise. He did, however, get back his chairman position following a unanimous ruling by the newly elected board.

Frank Paci, EVP finance and accounting, and Eileen Terry, EVP franchising, emerging brands, Canada, and global diversity officer, will earn $434,000 and $342,000, respectively, this year.

In the days following the May 10 salary adjustments, Shepherd sold more than 41,000 common stock shares for about $401,000; Zine, 100,000 shares for approximately $1 million; Stead, more than 94,000 shares for about $949,000; Wyatt, 35,000 shares for about $353,000; Paci, 16,500 shares for $164,000; and Terry, 10,600 shares for approximately $106,000.

The executive pay raises, which do not factor in bonuses or stock options, come at a time when Icahn has vowed to decrease selling, general and administrative (SG&E) expenses (including payroll) upwards of $200 million annually, according to analysts. In 2004, Blockbuster's SG&E was $3.13 billion, due in large part to growth initiatives, including online and in-store subscription programs.

Michael Pachter, media analyst with Wedbush Morgan Securities in Los Angeles, said in a research note he expects SG&E to “flatten” to $3.1 billion this year.

A Wattles Comeback?
Mark Wattles, founder and former CEO of Hollywood Entertainment Corp., has apparently not left the video store.

The current CEO and chairman of Denver-based game retailer Ultimate Electronics, who owns 1 million shares of Blockbuster common stock, told Bloomberg.com he is in “active discussions with potential buyers” to help acquire former perennial rival Blockbuster.

Wattles' interest, however sincere, could help further Icahn's clout on the board and give him a potential replacement to Antioco, who analysts contend was largely returned to the board to avoid a costly severance deal.

“Think about it,” said independent media analyst Dennis McAlpine with McAlpine Associates, Scarsdale, N.Y. “Icahn needs a replacement to run [Blockbuster]. He's going to pay Wattles to do it.”

McAlpine said Icahn's desire to increase shareholder value in the near term is diametrically opposite to Antioco's ambitious and costly strategy initiatives.

“Neither one is going to do what the other wants,” McAlpine said.

Wattles could not be reached for comment at his Las Vegas office.

Blockbuster spokesperson Karen Raskopf, who said the company doesn't comment on “rumors,” said Antioco would begin visiting select stores in June to talk with employees and reiterate his core business strategies.

“He wants to drive home the message that he is here, that he is focused on the business and that we all need to focus on the customer,” Raskopf said.

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