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Update: Icahn Confronts Antioco

5 May, 2005 By: Erik Gruenwedel

Carl Icahn (L) and John Antioco

Months of sometimes acrimonious debate between rebel investor Carl Icahn and Blockbuster Inc. chairman and CEO John Antioco reached a crescendo today when Icahn barged in on Blockbuster's first-quarter earnings call to challenge the chief executive as the company reported a loss.

With company stockholders set to vote next Wednesday (May 11) on candidates for three open seats on Blockbuster's board of directors — one of which is Antioco's — Icahn used the earnings call Q&A session to confront the CEO on what he termed was Antioco's “egregious $50 million bonus,” and board accountability, among other issues.

Icahn last month submitted himself and veteran entertainment industry executives Strauss Zelnick and Edward Bleier as nominees to Blockbuster's seven-member board.

During the call, Antioco responded tersely to Icahn that Blockbuster's compensation committee approved his $7 million compensation in 2004, and that additional monies owed him are predicated on his continued employment, performance and related issues.

“I didn't get a $50 million bonus,” Antioco said. “I think you know that, quite frankly.”

He chided Icahn to “stick to the facts” that have to do with how Blockbuster is running the business as opposed to things “that you think are inflammatory to get attention.”

Icahn, who claimed he was being mischaracterized, reiterated his concerns before being cut off by the conference call moderator.

“Are you willing to agree that if these initiatives [including online subscriptions and no late fees] don't work out that you would allow your whole board to be [put] up for [re]-election next year?” Icahn asked.

Antioco said it was the board's decision — not his — whether to hold complete elections in 2006.

Tale of the Tape
Regardless of the rhetoric, Blockbuster cited the elimination of late fees, a failed acquisition attempt of Hollywood Entertainment Corp., and implementation of online subscription initiatives in posting a first quarter (ended March 31) loss of $57.5 million, or 31 cents per share, compared to $114 million net income, or 63 cents per share, during the same period last year.

One-time charges of $12.6 million related to the failed Hollywood acquisition effort and $10.1 million for non-cash share-based compensation expenses contributed to a loss of 8 cents per share.

Revenue was up 3 percent, to $1.55 billion, largely due to increases in company stores and 28.7 percent growth in sales of movies and games. Elimination of late fees, which resulted in a 12.6 percent decrease in rental revenue, helped push same-store rental revenue down 5.5 percent, and resulted in a 4 percent worldwide decline in revenue to $1.1 billion from $1.15 billion last year.

Election Countdown
While Antioco and Icahn each have staked their claim to victory in the pivotal board vote, media analysts contend the outcome could be a tossup.

Marla Backer, analyst with Research Associates — Soleil Securities, thinks it will be a pyrrhic victory for either side, with shareholders likely re-electing Antioco and voting in one or two of Icahn's slate.

“Shareholders feel Antioco shouldn't be removed, but also believe Icahn has made some valid points,” Backer said.

Institutional Shareholder Services (ISS), which advises shareholders on proxy and regulatory issues, this week recommended as much, saying Icahn's election would be a disruptive presence on the board, and that “[Icahn] is simply using the proxy fight to promote his own personal agenda.”

It remains to be seen how shareholders can select candidates from both slates, as proxy rules do not allow mixing candidates from separate proxy ballots.

Antioco, who has stated he would leave the company if not re-elected chairman of the board, said he was unsure of his actions should he and one or two of Icahn's nominees be elected to the board. He said his decision would depend on “several factors.”

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said Antioco needs a reality check if he thinks shareholders should arbitrarily support his directors.

“It is like having an all-Republican Congress,” Pachter said. “I would not be comfortable with that. Nor would I be comfortable with an all-Democratic congress. You want debate. It leads to a better conclusion.”

Icahn, in numerous letters to shareholders, has denied he posed a disruptive force on the board, and said he would bring “financial acumen … unmatched by any of management's nominees,” to the board.

Icahn said he intended to cooperate with Blockbuster's management, but remained concerned that current initiatives — notably the elimination of late fees — “continue to be inadequate,” and if earnings and cash flow continue to fall, “management should be held accountable.”

Analyst Backer said, “Blockbuster management generally manages by throwing a lot of spaghetti against the wall and seeing what sticks. And maybe when cash flow is very rich it is okay to do that. But when cash flow is under as much pressure and the company is under as much scrutiny, it is not a very good way to manage. Icahn is already having a good influence.”

Holly J. Wagner contributed to this story.

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