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Blockbuster proxy battle turns nasty

Despite high-minded talk from both sides, the fight for the hearts of shareholders gets more heated by the day.

By MARK ALBRIGHT
Published April 19, 2005

Struggling to reinvent the nation's dominant video rental chain, the management at Blockbuster Inc. is fighting to hang onto their jobs in a proxy battle with the company's largest shareholder, veteran corporate raider Carl Icahn.

The feud boiled over last week when Icahn blasted Blockbuster chief executive John Antioco's $51-million compensation package as "unconscionable," his thwarted takeover of Hollywood Video as a "grave error" and his attempt to broaden Blockbuster's reach in the fast-changing home entertainment industry as a "spending spree."

Icahn then fielded his own slate of three candidates for director at the company's annual meeting May 11 in Dallas. Among the directors Icahn is trying to unseat is Antioco, who also is chairman.

Thus begins another noisy proxy battle for the hearts and minds of shareholders. Both sides are making high-minded arguments about corporate strategy and how to best enhance shareholder value. But how the fight ends is usually down and dirty. Management wins the overwhelming majority of proxy fights, so raiders' motives are seldom as clear as they seem. Occasionally they succeed in sending management a message or become an agent of change. More often dissidents are kicking up a public fuss to stimulate a stock price or find a profitable exit strategy.

Icahn, perhaps best known for his ill-fated hostile takeover of Trans World Airlines, also has a history of rattling sabers to prod companies to buy his silence. He recently dropped a proxy challenge to the management of Kerr-McGee Corp. after the Oklahoma oil and gas company agreed to buy back $4-billion of its shares at a 15 percent premium. Icahn's investor group pocketed a $57-million gain on its 8 percent stake.

Icahn controls 9.7 percent of Blockbuster's Class A shares and 7.3 percent of the B shares.

Chris Young, co-head of mergers and acquisition research at Institutional Shareholder Services, which advises large stockholders on proxy fights, said Icahn would go away if Blockbuster paid shareholders a $330-million dividend he requested, but Antioco rejected.

Most proxy fights are settled before a vote. "This one looks like it may go the distance," Young said.

Antioco counterpunched with a terse response to shareholders over the weekend.

Icahn's urging that the company scale back the experiments to pay a one-time dividend to shareholders would be "shortsighted and could bring about a precipitous drop in our future cash flow from which there may be not a recovery."

"The turmoil and uncertainty you have created threatens to destroy the organization, jeopardize our success and could prove damaging to shareholder value," he wrote.

Antioco said following Icahn's lead would be "tantamount to a liquidation strategy."

For Blockbuster the battle comes as the one-time 500-pound gorilla of the video rental business casts about for a future as video rentals sharply decline. DVDs sell for only a bit more than rental charges these days. Video game retailers have been siphoning off business by letting customers buy and sell used games. Online mail order houses such as Netflix and one run by Wal-Mart have walked off with many of the best rental customers.

Spun off from Viacom Inc. last fall, Blockbuster boldly kicked off several initiatives to refresh its grip on a rapidly morphing industry. But Antioco's results have been mixed.

His heavily promoted "end to late fees" policy stimulated the rental business by eliminating one of customers' biggest complaints.

But the company was dogged by consumer protection agencies in 48 states that questioned whether the ads were misleading. The company paid $630,000 to settle the investigations out of court, but faces a lawsuit in New Jersey.

The company has belatedly launched its video game exchange venture against entrenched competitors. Its monthly fee alternatives to Netflix, however, unleashed a profit-sapping price war.

Blockbuster also slowed the development of its online business and put off developing an exchange system for used DVDs.

--Information from the Associated Press was used in this report. Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified April 19, 2005, 01:19:14]