Suspense Builds at Video Giant

For Blockbuster Inc., there’s no rewinding to calmer days.

On Wednesday, a nasty fight comes to a head when shareholders vote at the company’s annual meeting in Dallas on whether to replace three directors, including Chief Executive John Antioco, with dissidents led by veteran corporate raider Carl Icahn. Regardless of the outcome, the ailing video rental chain is likely to remain under pressure from Icahn to turn things around fast, or look for a buyer.

For weeks Icahn has made the vote a personal referendum on Antioco. Blockbuster’s largest shareholder with about 10% of the stock, Icahn contends that the Dallas-based company is bleeding money while the chief executive collects fat bonuses.

Antioco counters that Icahn is spreading misinformation.

“Quite frankly, I don’t think he brings any skills to this company that are going to be helpful,” Antioco said.

Antioco defends his past actions, which include the scrapping of Blockbuster’s unpopular late-fee system even though the move could cost as much as $300 million in operating income. He also started an online rental business that delivers DVDs by mail.

But Antioco was thwarted in his bid to buy rival Hollywood Entertainment Corp. when it was clear that the deal wouldn’t pass muster with federal antitrust regulators.

Nonetheless, the 55-year-old CEO insists that Blockbuster is attracting more business.

“Our customer counts are up for the first time in several years,” Antioco said. “Our transactions are up....Those are very strong indications that customers like what we are doing and are responding with their business.”

Antioco predicts chaos if Icahn’s group gets its foot in the door. Icahn’s slate includes former BMG Entertainment Chief Executive Strauss Zelnick and former Warner Bros. executive Edward Bleier. Antioco fears that having dissenters on the board would stymie necessary moves.

Icahn didn’t respond to requests for an interview. But Zelnick said he would have no set agenda if elected.

“It would be my obligation to really learn and understand,” he said. “I’d make it a point not to arrive with preconceived notions.”

Los Angeles businesswoman Linda Griego, a Blockbuster board member whose reelection also is being challenged by the Icahn slate, said board members carefully scrutinized Antioco’s strategy.

“The impression being bandied about is that we are all his yes people,” she said. “If only they knew. There is no rubber-stamping of his decisions.”

Even if Icahn’s slate sweeps, he won’t control enough board positions to run the company. Nonetheless, Antioco vows to leave Blockbuster altogether if he loses his board seat in the election, a scenario analysts believe is unlikely.

The fight comes as the once-powerful company struggles to get back on its feet. Mass merchandisers such as Wal-Mart Stores Inc. and Best Buy Inc. now sell millions of inexpensive DVDs. And the online company Netflix Inc. is eating away at the video rental business that Blockbuster has dominated.

“Brick-and-mortar stores will continue to serve a segment of consumers who are comfortable with them,” Netflix Chief Executive Reed Hastings said. “But that business will steadily decrease over the next 10 years. At a certain point stores will close, because there is not enough revenue to stay open.”

This reality is not lost on Antioco, who has said his strategies are necessary to save the company. The video rental industry has been in decline for three years running and is expected to continue to decline by 4% annually.

Some analysts disapprove of the cold shoulder Antioco has given Icahn. Last week the two men got into it during Blockbuster’s quarterly earnings conference call with analysts. Icahn peppered Antioco with questions until an operator cut him off.

“What is wrong with having a minority view on the board?” said Michael Pachter, an analyst with Wedbush Securities. “I’m really disappointed in his position that any dissent is bad.”