Billionaire investor Carl Icahn is so convinced he was right to sell some of his Netflix Inc stake that he made a big bet - possibly worth hundreds of millions of dollars - with his son Brett, who disagreed with the decision.
Icahn, whose firm acquired Netflix shares for an average price of $58 against their current price at $330, cut his 9.4 percent stake by more than half to 4.5 percent, booking profits of around $800 million, he revealed on Tuesday.
His son Brett Icahn, 34, who came up with the idea to invest in Netflix, and Brett's investment partner David Schechter, said in a statement they believe the streaming video company is still undervalued. They said they did not want to reduce the stake in the company, which produced the Emmy Award-winning drama series "House of Cards."
So Icahn agreed to make up for any lost profits by injecting money into funds run by his son and Schechter if their views are proven right and it turns out he sold the Netflix shares too soon, according to a regulatory filing which details the agreement. If the shares climb further, then Icahn has committed to make "cash or cash equivalents" available to a new fund under Brett Icahn and Schechter's management, called the New Sargon Portfolio, it said.
Carl Icahn didn't return calls seeking comment. Brett Icahn responded to emailed questions by referring to the filing but declined to elaborate. Schechter couldn't be reached for comment.
The father-son agreement is one of the more unusual bets seen in the investment world. It exposes the dynamic between the corporate raider-turned-activist investor and a son who has been slowly cutting his teeth in money management.
It is unclear whether Carl Icahn needed the agreement of his son and Schechter to reduce the stake and the bet was the result, or whether it was a much more informal arrangement.
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 at between $304.23 and $341.44 to reap a profit of about $800 million, continue to climb to say $500 then Icahn would have missed out on a much bigger potential gain of about $1.3 billion. He would pay the Sargon portfolio a large part of the difference - through a complex calculation that includes assumptions, a hurdle, and is also related to the shares' value at the end of March this year. The agreement expires in August 2016.
Netflix shares have dropped about 15 percent from an all-time high of $389.16 hit on Tuesday, before Carl Icahn did the bulk of his selling. They closed on Wednesday at $330.24.
It is unclear whether Brett Icahn and Schechter would personally take a slice of any payment from the older Icahn or just reinvest the money in the fund.
If Carl Icahn's decision to sell is proven to be the right investment call and Netflix's shares fall, both father and son will see their profits from the investment pared, given they still own 2.67 million shares, or a 4.5 percent stake. There will be no additional penalty for his son's funds if the share price falls below the Icahn selling price.
Such a decline in Netflix's shares would validate Carl Icahn's status as one of the world's savviest investors and dealmakers. In the filing, he said in reference to the Netflix investment that as a "hardened veteran of seven bear markets I have learned that when you are lucky and/or smart enough to have made a total return of 457 percent in only 14 months it is time to take some of the chips off the table."
The younger Icahn and Schechter, however, said Netflix "remains significantly undervalued" and "one of the great consumer bargains of our time."
The Sargon Portfolio, which the younger Icahn and Schechter co-manage and Carl Icahn supervises, has generated 37 percent annualized returns since its inception on April 1, 2010, through September 30, 2013, and currently manages in excess of $4.8 billion 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 billion investment in Apple Inc, though Icahn himself has been communicating with Apple CEO Tim Cook. Icahn tweeted on Wednesday that he "just sent a letter to Tim Cook. Full letter will be disclosed on my website, the Shareholders' Square Table, which will be launched tomorrow."