Icahn family's House of Cards: Father-son drama over Netflix stake

Reuters

By Jennifer Ablan

Oct 23 (Reuters) - Billionaire investor Carl Icahn is soconvinced he was right to sell some of his Netflix Inc stake that he made a big bet - possibly worth hundreds ofmillions of dollars - with his son Brett, who disagreed with thedecision.

Icahn, whose firm acquired Netflix shares for an averageprice of $58 against their current price at $330, cut his 9.4percent stake by more than half to 4.5 percent, booking profitsof around $800 million, he revealed on Tuesday.

His son Brett Icahn, 34, who came up with the idea to investin Netflix, and Brett's investment partner David Schechter, saidin a statement they believe the streaming video company is stillundervalued. They said they did not want to reduce the stake inthe company, which produced the Emmy Award-winning drama series"House of Cards."

So Icahn agreed to make up for any lost profits by injectingmoney into funds run by his son and Schechter if their views areproven right and it turns out he sold the Netflix shares toosoon, according to a regulatory filing which details theagreement. If the shares climb further, then Icahn has committedto make "cash or cash equivalents" available to a new fund underBrett Icahn and Schechter's management, called the New SargonPortfolio, it said.

Carl Icahn didn't return calls seeking comment. Brett Icahnresponded to emailed questions by referring to the filing butdeclined to elaborate. Schechter couldn't be reached forcomment.

The father-son agreement is one of the more unusual betsseen in the investment world. It exposes the dynamic between thecorporate raider-turned-activist investor and a son who has beenslowly cutting his teeth in money management.

It is unclear whether Carl Icahn needed the agreement of hisson and Schechter to reduce the stake and the bet was theresult, or whether it was a much more informal arrangement.

"NOTIONAL" VALUE

The payment to New Sargon will be based on a "notional"position in Netflix - as if the stake had not been reduced.

For example, if the Netflix shares, which Icahn sold atbetween $304.23 and $341.44 to reap a profit of about $800million, continue to climb to say $500 then Icahn would havemissed out on a much bigger potential gain of about $1.3billion. He would pay the Sargon portfolio a large part of thedifference - through a complex calculation that includesassumptions, a hurdle, and is also related to the shares' valueat the end of March this year. The agreement expires in August2016.

Netflix shares have dropped about 15 percent from anall-time high of $389.16 hit on Tuesday, before Carl Icahn didthe bulk of his selling. They closed on Wednesday at $330.24.

It is unclear whether Brett Icahn and Schechter wouldpersonally take a slice of any payment from the older Icahn orjust reinvest the money in the fund.

If Carl Icahn's decision to sell is proven to be the rightinvestment call and Netflix's shares fall, both father and sonwill see their profits from the investment pared, given theystill own 2.67 million shares, or a 4.5 percent stake. Therewill be no additional penalty for his son's funds if the shareprice falls below the Icahn selling price.

Such a decline in Netflix's shares would validate CarlIcahn's status as one of the world's savviest investors anddealmakers. In the filing, he said in reference to the Netflixinvestment that as a "hardened veteran of seven bear markets Ihave learned that when you are lucky and/or smart enough to havemade a total return of 457 percent in only 14 months it is timeto take some of the chips off the table."

The younger Icahn and Schechter, however, said Netflix"remains significantly undervalued" and "one of the greatconsumer bargains of our time."

The Sargon Portfolio, which the younger Icahn and Schechterco-manage and Carl Icahn supervises, has generated 37 percentannualized returns since its inception on April 1, 2010, throughSeptember 30, 2013, and currently manages in excess of $4.8billion for Icahn Enterprises and Carl Icahn's own capital.Icahn Enterprises has assets of approximately $29 billion.

Carl Icahn has also credited his son for his $2 billioninvestment in Apple Inc, though Icahn himself has beencommunicating with Apple CEO Tim Cook. Icahn tweeted onWednesday that he "just sent a letter to Tim Cook. Full letterwill be disclosed on my website, the Shareholders' Square Table,which will be launched tomorrow."

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