UPDATE 1-Blockbuster shareholders take aim at Icahn deal

* Shareholders organizing, seeking to top Icahn’s plan

* Company needs new CEO by year-end

* Has identified CEO candidate from “major studio”
(Rewrites throughout to update with efforts by shareholders to
fight Icahn’s restructuring plan)

By Tom Hals

WILMINGTON, Del., Oct 20 (BestGrowthStock) – A large group of
Blockbuster Inc (BLOAQ.PK: ) 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 like those offered by Netflix Inc (NFLX.O: ) 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.

CLOCK IS TICKING

Shareholders generally get nothing when a company files for
bankruptcy, although 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 already 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 currently battling for control over the Lions Gate
Entertainment Corp (LGF.N: ) 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, California.

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.
(Reporting by Tom Hals; Additional reporting by Sue Zeidler in
Los Angeles; Editing by Gerald E. McCormick)

UPDATE 1-Blockbuster shareholders take aim at Icahn deal