Blockbuster shareholder group stands up to Icahn

By Reuters
Posted Oct. 20, 2010 at 2:05 p.m.

A large group of Blockbuster Inc. shareholders is seeking a better offer for the bankrupt movie rental chain than the deal that would put billionaire Carl Icahn and a group of hedge funds in control.

Shareholder Greg Maggipinto said he and other investors who own up to 40 percent of the stock think Icahn’s deal, which would wipe out his holdings, undervalues the company.
He said they are organizing to find their own buyer, and more than 100 shareholders have contributed money to hire a law firm to represent them.

The best way to expose the shortcomings of the Icahn deal for the company would be “to put a higher bid on the table,” said Maggipinto, who according to court documents owns about 700,000 Blockbuster shares.

A year before its bankruptcy, those shares were worth around $1.40 each and traded on the New York Stock Exchange. Today the pink-sheet stock is trading for around 4 cents a share.

The largest U.S. video retailer succumbed to bankruptcy last month after being battered by online and mail-order services such as those offered by Netflix Inc. that have changed the media habits of its customers.

Its restructuring plan would give Icahn and his hedge fund partners control of the company in exchange for their senior debt. Icahn and the hedge funds also provided the company with a $125 million debtor-in-possession, or DIP, loan to fund operations while in bankruptcy.

Shareholders would have to find the money to pay off the DIP loan and offer a better recovery on the debt held by Icahn, Owl Creek Asset Management LP, Monarch Alternative Capital LP, Varde Partners Inc. and Stonehill Capital Management LLC.

The shareholders have hired Paul Rachmuth of the Gersten Savage law firm in New York to represent them.

Shareholders generally get nothing when a company files for bankruptcy, though some well-heeled hedge funds succeeded in fighting for a recovery from Visteon Corp. and Smurfit-Stone Container Corp. Retail investors usually lack the funds to make any headway.

The Blockbuster shareholders do not have much time.

The agreement with the Icahn group puts Blockbuster on a tight schedule to emerge from bankruptcy and requires creditors to start voting on the as-yet undisclosed plan in January.

The restructuring agreement also requires the company to replace its chief executive, James Keyes, by the end of the year with someone acceptable to Icahn and his partners.

The movie rental company has identified a “candidate from a major studio,” according to a court filing on Tuesday. It said it could also name an internal candidate to fill the role.

“They want someone who knows restructuring, retail and who knows media, content and digital streaming,” said a source familiar with the recruiting process.

Blockbuster wants the U.S. Bankruptcy Court in Manhattan to allow it to hire executive search firm Korn/Ferry International to identify CEO candidates.

Icahn is battling for control over the Lions Gate Entertainment Corp. film studio. He has also thrown his support behind a Lions Gate proposal to merge the studio with Metro-Goldwyn-Mayer, a rival that is preparing to file for bankruptcy.

Maggipinto said Keyes, who joined Blockbuster in July 2007 after serving as president of convenience store chain 7-Eleven Inc., has become a liability to Icahn and his group. Ridding Blockbuster of former management members would help end questions about the deal they struck with Icahn, he said.

“I think it’s awfully embarrassing that Keyes, who destroyed the equity for Carl Icahn, has to stick around and answer questions about that. It’s better if you cover your tracks,” said Maggipinto of San Jose, Calif.

Blockbuster and Icahn did not immediately return calls for comment.

The case is In re: 10-14997, U.S. Bankruptcy Court, Southern District of New York.

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