Hello and welcome, you are listening to Patrick boil on finance a podcast, exploring ideas, from quantitative Finance examining events occurring in markets right now and financial history to see what lessons can be taken away including interviews with some of the most interesting people in the world of Finance to learn more about the podcast, visit on finance dot-org. Carl Icahn has had a long career We're in markets, starting out. As a stockbroker in 1961 later,
becoming a risk. Our Band 2 options Trader in the 70s and 80s. He was in notoriously, corporate Raider. He was accused of being an asset stripper. The worst kind of stripper in his dealings with TWA today. He's a notoriously activist investor known for forcing. Even the most respected CEOs to bend to his will, like apples, Tim Cook, who he pressured to Turn Capital to investors to a share buyback. In 2014 some of icons earliest Arbitrage trades involved
investing in closed-end. Mutual funds, a type of investment company, which often trades at a discount to the value of the assets. They hold he would then agitate for the fun to liquidate yielding, a profit icon who has spent his whole career on offense now finds himself playing defense. As another activist investor. Hindenburg research is claiming that icons 18 billion dollar market cap holding company, icon Enterprises has a Ponzi.
Like economic structure. That is sustained only to the extent that new money coming in is willing to risk being the last holding. The bag in brief icon is accused of using money taken in from new investors to pay out, dividends to Old investors and Accused of doing this to keep the stock price High stock that he has pledged as collateral for a
margin loan. Hindenburg is a short selling activist hedge fund run by Nate Anderson and earlier this year, I covered their allegations against adani. Group Anderson, is most famous for having released a video of Nickolas electric truck, prototype being towed, up a hill in order to be pushed down to make a promotional. Video showing that the technology was fully operational. Trevor Milton, the CEO of Nicola ended up being convicted of fraud based partially upon this
evidence. Hindenburg have recently been in the press for taking aim at beard enthusiasts Jack. Dorsey's payments company block at the end of 2020 to the net asset value of Icon. Enterprises was marked at five point six billion dollars. Let's market value was 18
billion dollars. This is quite a surprising premium icon Enterprises has two unusual features one is that it has a very high dividend yield and the other is that around 88 percent of its shares or units are held by Carl Icahn anti son Brett, who typically take their dividends in shares, rather than cash, the dividend is only paid out in cash. To the twelve percent or so of outside. Investors Hindenburg says that icon Enterprises funds.
This dividend through continuous share sales rather than the cash flow of its investment hintonburg. Describe their view of this alleged Arrangement, as Ponzi like prior to the release of the Hindenburg report icon, Enterprises had a 15 percent dividend yield, the stock fell 40. Send when the report was released earlier this week, the declining share price means that the yield has rocketed to over 25%. The fall in the unit price has knocked around five billion
dollars off. The net worth of Carl Icahn and Carl is 87 years old right now and losing five billion dollars at this stage in his career is likely to severely impact his retirement. So most investors in trying To work out if a stock is overvalued or not. Firstly check. If Cathy wood has a large position in the stock and secondly check to see if Jim Cramer has recently called it a by we get mixed signals here.
As Kathy doesn't seem to own it and Kramer says, I think it absolutely is going to be a winner, right? You got 40 percent, yield call icon but I will not recommend stock so that I don't know what's in it. Just it just has to turn the show. I don't know what's in that fun. I can't recommend. I don't know is a can't recommend from Kramer good or bad. It's hard to say. Maybe he wants to recommend but he just can't we'll never know. I guess we'll just have to look in Greater detail at the
accusations. There's no shortcuts today. The main tree claims being made by Hindenburg are firstly that the units are overvalued relative to their reported net asset value. And this has happened because retail investors are I'm dazzled by the high dividend yield. Secondly, Hindenburg or implying that the dividend itself is somewhat fraudulent because it's not funded by earnings.
But instead by selling new stock to retail investors, thirdly, they claim to have uncovered evidence that icon Enterprises overvalue. Some of its less liquid assets, when calculating the net asset value, I mean, what is it?
A black stone real estate fund. Finally, they're saying that I can make poor Investments that have negative operating cash flows, which further, shrink the asset value, and makes the different unsustainable Hindenburg claimed to have uncovered evidence of inflated valuation marks being used for some of the less liquid and private assets included in the holding company. They give the example that IEP owned 90% of a publicly-traded meat.
Packaging business, that it valued a 243 million dollars at year end, when the listed company had a market value of only 89 million dollars at the time. Hindenburg claim that IEP were marking. The value of this illiquid stock who stock price can be observed in the market, 204 percent above, the prevailing public market price, the report states that IEP marked its Automotive.
Parts division, a 381 million dollars in December, 20 22 and that its key subsidiary declared bankruptcy a month later, you're not really meant to do that. They take shots at Icon stock-picking to saying our analysis of icons, latest December twenty, twenty two, thirteen at filing indicates that, IEPs long Holdings have lost approximately four hundred and seventy 1 million. In dollars in value, year-to-date, despite the SP gaining. Approximately nine point two percent over the same time
frame, they estimate that IEPs. Current nav is closer to 4.4 billion dollars or twenty two percent lower than its disclosed year-end indicative. Now, have a five point six billion dollars suggesting that units were trading at a three hundred and ten percent premium to not have would an Dividend rate of 64% of now have in their report, Hindenburg calls at Jeffrey's. The only brand name, Investment Bank, that publishes research on icon Enterprises.
They highlight the Jeffries. Also helps the company to sell its stock. Where is Credit. Suisse when you need them, the report says, in essence Jeffries, is luring in retail investors through its research arm, under the guise of IEPs. Safe dividend while also selling billions in IEP unit through its Investment Banking arm to support the very same dividend. They say that Jeffries has run all 1.7 billion dollars of Icon Enterprises at the market stock
offering since 2019 icon. Enterprise has responded to the criticism by saying that it stood by its disclosures the press release says I believe the self-serving short seller report published by Hindenburg research today. Was intended solely to generate profits on Hindenburg short position at the expense of. IEPs long-term bag holders, sorry unit holders, not bike holders, there. They're holding unit anyhow, the Hindenburg report highlights that icon has taken out margin loans on out.
Icahn Enterprises meaning that he's borrowed money using his stock as collateral. The report says that he's pledged around 60% of his IEP Holdings for personal margin loans. If the stock were to continue to fall icon, could be forced to sell stock to meet margin calls, which could push the stock price down even further. They point out icon has not disclosed the details of these margin loans, like loan. Value maintenance thresholds.
So there's no way of knowing when he could be forced to sell in many ways. The allegations against icon are very similar to the allegations Hindenburg made against adani
group. Earlier this year a company that is mostly family-owned which is being accused of manipulating up its price in order to borrow money and to issue stock at inflated values Hindenburg additionally points out That IEP is highly levered with 5.3 billion dollars in dead and maturities of 1.1 billion, 1.36 billion and 1.35 billion do with in 2024, 20, 25 and 20 26 respectively.
They point out that most closed and holding companies trade, close to their net asset value, or at a discount to their knobs. The report highlights for That Vehicles run by other star managers like Dan Loeb, and Bill Aikman traded discounts of 14% And 35% to not respectively. As I mentioned earlier, icon used to break up. This type of company to extract
the value associated. With these discounts, conglomerate companies are really any holding company entity, that's a grab bag of many other businesses including structures like closed. And funds typically trade and often trade for decades of time at a discount to their net asset values. This is the case even in situations where the portfolio itself is holding clearly identifiable assets with well-known Market valuations, sometimes they're holding shares in publicly listed companies.
There is in fact, an entire valuation method used in corporate finance called some of the parts valuation. Which exists to Value. Conglomerate Style holding entities. And it's well understood that market valuations are often well below. The sum of the parts valuations in part because investors apply a discount to these businesses due to concerns about
management. Waste concerns that management might misuse retained earnings for malinvestment to retain control over as large business as possible investors are Also concerned about the timing of capital returns to shareholders the timing of sales of elements of the underlying portfolio to worrying that the holding company management will sell at the worst possible time in the future or about tax uncertainty
around future dispositions. When Hindenburg compared icon Enterprises to all 526 US, based closed-end funds in Bloomberg. Database IEPs premium to nav was higher than all of them and more than double the next highest that they found. So look, the term Ponzi like economic structure, it does sound bad. It's frankly over 100 years since we've heard anyone really speaking well of a Ponzi like economic structure. And that's mostly because it's
been over 100 years. Since Charles Ponzi was put in prison for his scheme. Essentially, the Accusation that Hindenburg is making is that the shares trade for more than they're worth. And for this reason, icon is selling additional shares for more than they are worth to the public in order to pay a big dividend to shareholders.
I mean, it's basically just a meme stock, if people will pay more for your shares than they're worth, it probably makes sense to sell additional shares to people who are willing to overpay for them, at least icon has restrained. Himself from behaving like Adam Moran and doing interviews in his underwear to keep the stock price elevated.
Matt Levine from Bloomberg. Argues that the way this structure works Carl Icahn is the majority owner of a bag of cash and he keeps giving other people some of the cash in exchange for an increasing ownership stake, in a shrinking bag of cash Levine points. Out, that Carl is himself taking the risk of becoming Coming the last one holding the bag. Of course he is borrowed against the overvalued unit.
If the stock fell enough in value to the point of which it started trading at a discount, now have call could stop selling new shares as he wouldn't want to sell them at a discount to not have, but he could keep paying shareholders a dividend and paying himself in shares in order to increase his ownership in the now. Undervalued bag of cash it Quite a game. We shouldn't forget.
The management fees associated. With this structure, either Carl Icahn. And his management team are charging around 2% annually on the funds now have or over a hundred million dollars per year for running the holding company. I was a bit amused by how hard it was to dig the management fees out of the investor presentation that's available online, but I found an SEC filing where they avoid the use
of the term. Fees. Instead, they use the term special profits, interest allocations, which range from one and a half percent to two, and a quarter percent per annum. And then there are the incentive allocations, which must be a performance fee, which ranges from 15 percent. In some cases subject, to a preferred return, to 22 percent per annum. So, let's call it a 22 and 23 structure. You can. Hopefully see how Such a fee structure management. Might be tempted to exaggerate
the nav of the partnership. As that's what they charge fees on hindenburg's argument is that this stock trades at a 200 to 300 percent premium, to its net asset value, which is surprisingly High, especially for something that has not been identified as a meme stock, and it's hard to argue with them. On the point that there has been remarkably little discussion. Ian of this premium, now that this is being widely discussed. I think the stock can reasonably be expected to start trading.
Either closer to its nav, which might mean margin calls for Carl or he could start doing meme stock CEO stuff to pump the price back up. We've learned over the last few years that there's no need for a price to be grounded in economic reality. If the CEO can mean well enough. This is Possibly the best strategy for Carl right now.
Issuing, an mft seems very 2022 to me, but the stock has fallen around 40% since the report came out, leaving lots of room to sell more units at a premium to not have to fund. Maybe a dividend hike icon, Enterprises isn't a standard meme stock. It's a boomer meme stock and so 420 jokes. And then ft's might be badly suited to that generation. Nation, but a dividend hike might just do the trick. I'm not sure though.
I'm a bit out of date on the mechanics of meme stock pumping, but if you have any suggestions do let me know in the comment section. Hindenburg did find one prominent endorser of their report Bill Aikman of Pershing Square who famously clashed with icon over the prospects of Herbalife, the supplements company that Aikman had shorted
many years. Go the two billionaires famously argued about it on. CNBC in 2013, they appeared to have since made peace but Bill Aikman tweeted about hindenburg's report when it came out. There's a karmic quality to this short report that reinforces the notion of a circle of life and death as such. It's a must read. Thanks for tuning in to today's podcast. If you found it interesting, send a link to some of your friends. That's how podcasts grow special.
Thanks to my supporters on patreon who support makes this podcast happen. Have a great day and talk to you again soon. Bye. If you enjoyed this episode, be sure to subscribe. So you're notified when a new episode is posted. Thank you to everyone who is supporting this content on patreon. If you enjoyed this content you can find more like it on YouTube on the Patrick boil on finance Channel, or follow us on Twitter at Patrick Boil. Thanks for listening. Bye.