updated 4/18/2005 3:00:15 PM ET 2005-04-18T19:00:15

Blockbuster Inc. escalated a feud with leading stockholder Carl C. Icahn, saying Monday that it would maintain its strategy of investing in an online movie-rental service and attacking Icahn's proposal for a bigger dividend.

Blockbuster, the nation's leading movie-rental chain, said Icahn's call to raise dividend payments by $330 million this year would be irresponsible and "tantamount to a liquidation strategy" given the company's capital structure and the declining market for video rentals.

In a letter to Icahn on Monday, Blockbuster chairman and chief executive John F. Antioco also called the corporate raider's criticism of the company "inaccurate and potentially misleading."

Antioco said Blockbuster's investment in the online service and change its late-fees policy had increased the chain's active membership for the first time in nearly two years. Antioco said if the company took Icahn's advice and reversed course, it could face "a precipitous drop in our future cash flow from which there may be no recovery."

Dallas-based Blockbuster has tried to cut spending elsewhere by putting aside plans to increase its game and movie-trading business until next year, Antioco said.

Blockbuster has slashed prices on monthly subscriptions to better compete with rivals, including online pioneer Netflix Inc. Blockbuster has also spent heavily on an advertising campaign touting a change in its late-fee policy.

Icahn, who controls 9.7 percent of Blockbuster stock, blasted the company April 7, accusing Antioco of going on a "spending spree" and faulting his decision to end a bid for rival Hollywood Entertainment Corp. The wealthy financier also took a jab at CEO Antioco's 2004 compensation package of cash and stock valued at $51 million.

Icahn said he would nominate his own slate of candidates for Blockbuster's board, and if elected they would limit spending, rein in executive bonuses and increase dividends. The company's annual meeting is scheduled for May 11.

This month, Icahn dropped a proxy challenge to the management of Kerr-McGee Corp. after the Oklahoma oil and gas company agreed to buy back $4 billion of its shares at a 15 percent premium. Icahn's investor group pocketed a $57 million gain on its 8 percent stake.

Chris Young, co-head of mergers and acquisition research at Institutional Shareholder Services, which advises large stockholders on proxy fights, said Icahn would go away if Blockbuster paid a $330 million dividend to shareholders.

But Monday's letter from Antioco shows that Blockbuster officials "are digging their heels in; they're not going to do what Kerr-McGee did and agree to pay their fairly significant dividend," Young said.

Most proxy fights, like the Kerr-McGee example, are settled before coming to a vote.

"This one looks like it may go the distance," Young said.

Marla Backer, an analyst with Soleil-Research Associates, said Blockbuster should not pay greenmail to make Icahn go away because it has other needs for the money, but she said the financier had raised valid criticisms.

Backer said Blockbuster has done a poor job of explaining its actions, including whether it could have bought Hollywood by meeting the concerns of antitrust regulators. However, she supported the company's investment in online rentals, one of the moves criticized by Icahn.

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