Carl Icahn, Dish Network Bid on Blockbuster

8:02 AM PDT 4/5/2011 by rludemann

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NEW YORK - The public portion of the auction of video rental firm Blockbuster dragged on into the evening hours on Tuesday with three remaining bidders - a group led by activist shareholder and billionaire Carl Icahn, Charlie Ergen's Dish Network and a group of financial firms that hold Blockbuster debt.

However, as of the early evening, lawyers and investment bankers representing Blockbuster and its creditors had ruled that a latest $308.1 million offer from the financial group was in the lead.

As the auction kicked off around 10:40 a.m. ET, a $284 million offer from satellite TV firm Dish had been deemed the lead bid.

The second-highest bid at $280.9 million came from Icahn's group, which also includes liquidators Great American Corp. and Tiger Capital in a sign that Icahn would look to close down at least some more Blockbuster stores as part of his strategy. Icahn himself showed up at the bankruptcy court building at around 1:30pm ET.

South Korean mobile phone operator SK Telecom was also admitted as a qualified bidder in the auction and pitched itself as the best option for studios looking to make back money owed to them. It was believed to be looking for mobile video content. Plus, there was a joint bid from liquidators Gordon Brothers and Hilco Merchant Resources, which offered to liquidate the firm's stores rather than continue to operate them, but that bid was eliminated early.

In the opening move of the auction, the Icahn group offered $291.4 million to take the lead in an early sign that he was a serious contender for an acquisition.

The group of financial firms that came together under the name Cobalt Video Holdco includes Monarch Alternative Capital, Owl Creek Asset Management, Stonehill Capital Management and Varde Partners. It had previously made a $290 million bid that was slightly different in certain financial details and that set the minimum acceptable in the Blockbuster auction.

As the auction dragged on with repeated interruptions, Cobalt as of 5:40pm ET topped the bidding showdown with a $308.1 million offer, including $166.7 million of money going to less senior debtholders. It was - at least as of that stage - deemed the "highest and best" bid, even though Icahn had offered $310.6 million overall. However, the Cobalt bid's higher recovery rate of $166.7 million for less senior debt-holders was slightly higher than the $164.2 million that the Icahn team had included in its offer. As was the case in earlier bidding rounds, representatives cited that as the reason for considering Cobalt's offer superior.

Icahn's latest bid had trumped Dish's updated bid of $307.1 million. In the auction process, one after the other, remaining bidders keep getting a chance to trump the current best offer to stay in the auction showdown.

The three remaining bidders -- Icahn, Dish and Cobalt -- were told that they would have to leave the court building at 5:45pm ET and continue the process at the offices of a nearby law firm. Reporters were allowed to follow the auction up to that point. A spokesman said the auction resumed at the law firm's offices around 7:30pm ET.

Blockbuster, which has suffered from the growth of Netflix and other competitors, is looking to wrap up a sales agreement before a Thursday court hearing in front of Judge Burton Lifland to approve a sale.

Lifland, who is overseeing the bankruptcy case, made available rooms at the bankruptcy court for the auction process, which had started Monday with a non-public portion.

In the early afternoon, SK representatives had pitched the mobile firm's latest bid as the best deal for studios, saying its goal was to preserve relationships with Hollywood players. If SK was successful, studios would get "over and above those amounts contemplated by all the other bids," a rep said Tuesday afternoon.

In fact, the rep said the company has reached deals for future distribution, if the bid turned out to be successful, with Sony, Universal and Fox. SK said its bid offered $60.7 million in total value for studios. That figure included a pro-rata distribution of $11.5 million to studios owed money by Blockbuster and $49.2 million in additional money for the three studios with which SK had reached going-forward agreements.

The team running the auction, however, ruled that the SK bid overall had a lower value than a previous bid from the group of financial firms. SK's reps requested time to mull a latest bid modification before returning to the room later. A rep then said that the company wouldn't update its bid as it still deemed it the best and highest. He added that SK was reserving all rights as the company was eliminated from the process by the Blockbuster reps overseeing it.