Icahn Enterprises’ Hypocrisy: A Corporate Raider’s Glass House

Icahn Enterprises (IEP) is an ~$18 billion market cap holding company run by corporate raider and activist investor Carl Icahn, who, along with his son Brett, own approximately 85% of the company.

According to Hindenburg Research, there are three primary reasons why IEP units are inflated by over 75%. Firstly, IEP is trading at a premium of 218% compared to its last reported net asset value (NAV), which is considerably higher than all other comparable entities. Secondly, Hindenburg Research has discovered concrete evidence of inflated valuation marks for IEP’s less liquid and private assets. Thirdly, the company has suffered further losses in performance year-to-date following its last disclosure.

Most closed-end holding companies trade around or at a discount to their NAVs. For comparison, vehicles run by other star managers, like Dan Loeb’s Third Point and Bill Ackman’s Pershing Square, trade at discounts of 14% and 35% to NAV, respectively.

“We further compared IEP to all 526 U.S.-based closed end funds (CEFs) in Bloomberg’s database. Icahn Enterprises’ premium to NAV was higher than all of them and more than double the next highest we found.”, Hindenburg Research said.

A reason for IEP’s extreme premium to NAV, based on a review of retail investor-oriented media, is that average investors are attracted to

(a) IEP’s large dividend yield and

(b) the prospect of investing alongside Wall Street legend Carl Icahn.

Institutional investors have virtually no ownership in IEP.

Icahn Enterprises’ current dividend yield is ~15.8%, making it the highest dividend yield of any U.S. large cap company by far, with the next closest at ~9.9%.

As a result of the company’s elevated unit price, its current annual dividend rate equates to an absurd 50.5% of indicative net asset value.

Hindenburg research said, Outlier dividend is made possible (for now) because Carl Icahn owns roughly 85% of IEP and has been largely taking dividends in units (instead of cash), reducing the overall cash outlay required to meet the dividend payment for remaining unitholders.

The dividend is entirely unsupported by IEP’s cash flow and investment performance, which has been negative for years. IEP’s investment portfolio has lost ~53% since 2014. The company’s free cash flow figures show IEP has cumulatively burned ~$4.9 billion over the same period.

Despite its negative financial performance, IEP has raised its dividend 3 times since 2014. IEP’s most recent dividend increase came in 2019, when it raised quarterly distributions from $1.75 to $2.00 per unit. IEP’s free cash flow was negative $1.7 billion in the same year.

Given that the investment and operating performance of IEP has burned billions in capital, the company has been forced to support its dividend using regular open market sales of IEP units through at-the-market (ATM) offerings, totaling $1.7 billion since 2019.

In brief, Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one “holding the bag”.

Supporting this structure is Jefferies, the only large investment bank with research coverage on IEP. It has continuously placed a “buy” rating on IEP units. In one of the worst cases of sell-side research malpractice we’ve seen, Jefferies’ research assumes in all cases, even in its bear case, that IEP’s dividend will be safe “into perpetuity”, despite providing no support for that assumption.

Since 2019, one bank has run all of IEP’s $1.7 billion in ATM offerings: Jefferies.

In essence, Jefferies is luring in retail investors through its research arm under the guise of IEP’s ‘safe’ dividend, while also selling billions in IEP units through its investment banking arm to support the very same dividend.

“Adding to evidence of IEP’s unsustainability, we estimate that IEP’s last reported indicative year-end NAV of $5.6 billion is inflated by at least 22%, due to a combination of overly aggressive marks on IEP’s less liquid/private investments and continued year to date underperformance.” The research firm said.

In one example, IEP owns 90% of a publicly traded meat packaging business that it valued at $243 million at year-end. The company had a market value of only $89 million at the time.

In other words, IEP marked the value of its public company equity holdings 204% above the prevailing public market price.

Hindenburg research said that IEP bought over a million shares of the company in December before immediately writing up the value of those shares by ~194% in the same month.

In another instance, IEP marked its “Automotive Parts” division at $381 million in December 2022. Its key subsidiary declared bankruptcy a month later.

IEP reported $455 million in “real estate holdings” in its most recent quarter. The reported values in this segment have been remarkably stable for years despite declining net income and despite including

(i) the Trump Plaza in Atlantic City, which was razed to the ground in 2021;

(ii) a country club that became nearly insolvent in 2020 before ownership reverted to its members in 2021; and

(iii) a lack of transparency on other assets and valuations.

The irregular valuation marks fit a pattern: In January of 2020, UBS dropped coverage of IEP citing a “lack of transparency” following its research showing marks that were “divergent from their public market values”, among other issues.

“Beyond aggressive marks, Icahn’s liquid portfolio has continued to generate losses. Our analysis of Icahn’s latest December 2022 13-F filing indicates that IEP’s long holdings have lost ~$471 million in value year to date, despite the S&P gaining ~9.2% in the same time frame.” the short seller said.

“IEP disclosed that its investment fund had a 47% notional short bet in its December 2022 filings. Given the positive market performance, we estimate this short bet has contributed at least a further $272 million in year-to-date losses.”, Research organization said.

“Overall, we estimate IEP’s current NAV as being closer to $4.4 billion, or 22% lower than its disclosed year-end indicative NAV of $5.6 billion. The analysis suggests that units currently trade at a 310% premium to NAV, with an annual dividend rate of 64% of NAV.” , Hindenburg Research said.

Tightening matters further, IEP is highly levered, with $5.3 billion in Holdco debt and maturities of $1.1 billion, $1.36 billion, and $1.35 billion due in 2024, 2025, and 2026, respectively.

IEP’s debt covenants limit the company’s financial flexibility: IEP is not permitted to incur additional indebtedness and is only allowed to refinance old debt. With interest rates having increased, IEP will need to pay significantly higher interest expenses on future refinancings.

Carl Icahn’s ownership in IEP comprises about 85% of his overall net worth, according to Forbes, giving him limited room to maneuver with his own outside capital. We have assessed that Icahn has little ability or reason to bail out IEP with a capital injection, particularly at such elevated unit prices.

Further underscoring Icahn’s limited financial flexibility, he has pledged 181.4 million units, ~60% of his IEP holdings, for personal margin loans. Margin loans are a risky form of debt often reliant on high share (or unit) prices.

“Icahn has not disclosed basic metrics around his margin loans like loan to value (LTV), maintenance thresholds, principal amount, or interest rates. We think unitholders deserve this information in order to understand the risk of margin calls should IEP unit prices revert toward NAV, a reality we see as inevitable.” , Hindenburg Research said.

Given limited financial flexibility and worsening liquidity, we expect Icahn Enterprises will eventually cut or eliminate its dividend entirely, barring a miracle turnaround in investment performance.

Hindenburg research said, a legend of Wall Street, has made a classic mistake of taking on too much leverage in the face of sustained losses: a combination that rarely ends well.