Brawling at Blockbuster

Anyone following the high-profile exchange of harsh words over the past few weeks between infamous corporate raider Carl Icahn and Blockbuster (NYSE: BBI  ) management has to be wondering what is at the core of this brawl.

First Icahn sent a letter to Blockbuster CEO John Antioco on April 7, expressing displeasure at the company's decision to allow rival Movie Gallery (Nasdaq: MOVI  ) to win the bidding war for Hollywood Entertainment (Nasdaq: HLYW  ) . The missive went on to chide management for its spendthrift ways, including Antioco's compensation package. Then Icahn announced plans to launch a proxy contest for control of the board of directors at the company's May 11 stockholders meeting.

On April 18, Antioco fired back in a press release, defending his actions and stating the company has been following a "strategy that is essential to confront the significant challenges facing our industry." He went on to say, "This strategy, which is designed to revitalize our core rental business and create alternative revenue sources, is working." On a more personal note, Antioco said the reference to his 2004 compensation was "not correct as it takes into account compensation that has not yet been earned or paid."

Loyal Fool readers were not likely taken in by this war of words. Icahn didn't buy a 9.7% stake in Blockbusters' class A shares and 7.7% of its class B shares just to make some tweaks to executive compensation. He is looking for value, as was finally confirmed on Tuesday, April 19, when he suggested in an SEC filing that Blockbuster should put itself up for sale.

A quick look at the numbers indicate there might be some value to be had. Movie Gallery is buying Hollywood Video for $850 million in cash, $350 million in acquired debt, less $46 million in on-hand cash. That works out to an economic value of 65 cents per dollar of 2004 sales. The stock market, given the activity in Movie Gallery's stock over the past few months, appears to consider this an appropriate value for the stores and the customer base of Hollywood Video. A similar read on Blockbuster suggests an economic value of 45 cents per dollar of 2004 sales.

Is this 20-cent gap the value Icahn is looking to capture? Hard to say at this point. Viacom (NYSE: VIA  ) tried pretty hard to sell its majority interest in Blockbuster, without finding any takers, before finally deciding last year to spin the company off. Movie renting rivals Netflix (Nasdaq: NFLX  ) and Wal-Mart (NYSE: WMT  ) seem happier to steal share from Blockbuster than to pay for it.

Perhaps this is just an effort to fuel a proxy fight or to get Blockbuster to buy Icahn out. Either way, expect more sparring between now and the stockholders meeting. Blockbuster has added a "Vote No on Icahn" section to its investor relations Web page. Looks like this brawl could turn into a rumble.

For more movie rental quibbling check out:

Fool contributor Timothy M. Otte has always preferred a hoedown to either a brawl or a rumble. He owns shares in Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy.


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