The Exchange

Carl Icahn’s Netflix Wager With His Son: What Might Junior Win (or Lose)?

The Exchange

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Carl Icahn

Can’t the super-rich just pick a fight over politics at Thanksgiving dinner like the rest of us? In the House of Icahn, at least, the battles are over which stocks to sell, with big money on the line — really big money.

Investing legend Carl Icahn, with an estimated personal net worth of $20 billion,  and his son Brett struck a highly unusual wager over the sale of nearly $1 billion of Netflix (NFLX) shares, with tens of millions of dollars potentially on the line for both sides.

Under the deal, the senior Icahn sold half his firm’s 9.4% position, locking in a staggering gain of 457% and netting a cool $800 million. While some have termed the move as possibly the "greatest trade ever," the younger Icahn openly disagrees with Dad's decision to unload the shares, saying he believes Netflix remains undervalued and that the stock should continue to rise. His father's sale of the shares means Brett and his business partner, David Schechter — who run a $4.8 billion fund known as the Sargon Portolio within the senior Icahn’s $29 billion firm — are potentially missing out on a substantial sum if Netflix's stock price continues to rise.

Winning or losing battle?

But the son may yet win this fight. The elder Icahn agreed to change the way to calculate a profit-sharing payment owed to Brett in a few years. Under a 2012 agreement, the Sargon managers are entitled to a profit-sharing payment of 7.5% of the gains of their fund, minus some costs and a hurdle rate, in 2016. Under the new agreement, the 2016 profit-sharing payment will be calculated as if none of the firm’s Netflix shares had been sold. If Netflix rises sharply, the pair will win additional cash. But if Netflix shares fall, they'll lose out.

“If the aggregate Deemed Proceeds are less than the aggregate Actual Proceeds, then the Cash Amount shall be deemed to be decreased,” the agreement filed with the Securities and Exchange Commission states.

Sargon is allowed to “sell” the pretend position at any point before 2016 as well.

The agreement included several hypothetical examples to calculate Sargon’s 2016 profits. Sargon has positions in other stocks, such as Apple (AAPL), where Carl Icahn is agitating to do a $150 billion share buyback. So much of the 2016 payment will depend on the performance of those investments, regardless of the impact of the pretend shares of Netflix.

Sargon’s total gains must exceed a hurdle of $350 million before the profit-sharing payment kicks in, according to the examples.

  • If the value of the Sargon portfolio overall does well and the value of the pretend Netflix shares rises 50%, the fund would show a profit of $4.25 billion in one scenario. That would leave Carl Icahn’s firm on the hook for a 7.5% payment roughly equal to $319 million.
  • Even if Sargon does well overall but Netflix shares fall 50% in value, the fund’s profit would total only $3.25 billion. Senior would owe junior only roughly $244 million in that example.
  • If the Sargon fund did well and Netflix was unchanged, the profit-share payment would be roughly $281 million, using the figures in the hypothetical examples.

So in these examples, Brett Icahn and David Schechter stand to gain or lose almost $40 million over the pretend Netflix shares versus what they would make if Carl didn't agree to the bet. That's the difference between the $281 million payment in the neutral scenario and the examples of a $319 million and $244 million payment above.

The Sargon pair initially convinced the elder Icahn, a veteran of decades of activist investing, to buy Netflix at $58 a share last year. Since then, the streaming video service has grown in leaps and bounds, thanks to an increasingly appealing stable of programming. Netflix won three Emmy awards for its original shows this year, the first awarded for content that never aired on cable or broadcast television.

News of Icahn’s partial sale has spooked Netflix investors. The shares hit an all-time of high of over $389 early on October 22. But once news of Icahn’s sale hit, shares dropped below $325. They had recovered only slightly to $332.46 on October 24.

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