Carl Icahn’s end game

Setting aside the language in Hindenburg’s report — “Ponzi scheme” is a pretty inflammatory charge — it’s clear that Icahn has been paying out far more in dividends than the cash he brings in. Since 2018, Icahn Enterprises has paid $1.1 billion in dividends, versus cash from operations of about $420 million, securities filings show.

It has closed that gap by selling new stock to investors, $1.9 billion worth since starting the offerings in early 2019. That helped keep Icahn Enterprises’s stock price up, well above the value of what it owns. That premium in turn has allowed the company to keep selling fresh stock, which allows it to keep paying out dividends, and on it goes, a self-licking ice cream cone that works until the stock price falls, which it now has.

Icahn Enterprises shares still trade above book value of about $16 a share, but the wiggle room is closing, falling from about $50 a share on May 1 to just over $20 today. Icahn hasn’t disclosed the terms of his loans from Morgan Stanley, or at what share price he’ll be forced to either sell stock or put up other collateral. He pledged another 21 million shares, about 7% of his holdings, as of May 8, which suggests his loan cushion was evaporating.

Margin loans can spark death spirals, which is why most companies don’t let their executives pledge their shares. I remember when, in 2015, the CEO of Valeant Pharmaceuticals found himself in hock to Goldman Sachs, which seized and sold his stock, contributing to a stock crash from which the company (now Bausch) has never recovered.

So what’s Icahn’s end game? Over a 40-year career, he has proven himself a wily investor, never backing down and no stranger to tactical gimmicks. Icahn Enterprises stock was never very liquid because Icahn himself owns 85% of it, and it has become increasingly hard to borrow in the past few weeks — borrowing costs soared from under 5% to 25% before settling in the teens, according to data from Interactive Brokers — which makes the situation ripe for a short squeeze.

Icahn Enterprises could use its $2.6 billion in cash to announce a partial buyback, a stock-juicing maneuver Icahn will remember from his investment in Herbalife and that seems right up his alley.

The federal investigation will likely make any such maneuvers harder. And it could give his investment bankers at Jefferies pause about working on any such deal. The firm’s cozy relationship with the billionaire — it has been the sole underwriter on Icahn Enterprises’ stock offerings and is the only investment bank to publish research on the company — featured heavily in Hindenburg’s report. (“For only the 50th time since starting coverage in 2013, Jefferies is advising clients to buy shares in Icahn Enterprises,” FT Alphaville writes.)

Plus if there’s one thing Icahn hates, it’s overpaying; he is a famously tough negotiator and has a reputation for trying to recut deals. His company’s stock, though battered, is still trading above book value.

“Icahn’s favorite Wall Street saying: ‘If you want a friend, get a dog.’” Ackman tweeted. “Over his storied career, Icahn has made many enemies. I don’t know that he has any real friends. He could use one here.”

Ackman and Icahn’s feud goes back to a 2003 deal in which Ackman thought Icahn stiffed him. (A judge agreed, and ordered Icahn to pay $9 million.) They have fought proxy wars over the years, notably on Herbalife, the supplements company.