2023-06-01 03:33:52 ET
Summary
- '26 bonds look attractive at 11.3% YTM.
- Stock is not attractive as dividend is toast. Forward cash flow barely covers the bonds but don't short it!
- Icahn should seek to sell Pep Boys Real Estate or borrow against it to retire holdco bonds to prove the value.
- IEP should open the investment subsidiary up to manage outside capital to generate fee income.
Icahn Enterprises (IEP) stock has fallen from $50.79 to $22.38 and there have been wild discussions regarding fraud & hyper leverage similar to Archegos. The bonds have also fallen with the yield on the 2026 bonds at 11.3%. While I don’t think IEP is a fraud or an Archegos, I think the that the stock is overvalued, but it is simply stupid to short the stock, as Icahn could simply purchase the 17% of stock he doesn’t own, causing a VW/Porsche type short squeeze and burning short sellers badly. Further, I believe there are some tactics that IEP management could implement to improve the business and ultimately the stock price via an increase in net asset value.
The Stock
Icahn Enterprises is a holding company that is a collection of businesses; with approximately 25% of the Gross Asset Value (“GAV”) is in illiquid assets including Real Estate, Automotive; and Other. The marks appear on the aggressive side, as Automotive Real Estate is $831 million. In the footnotes of IEPs response to Hindenburg, IEP says that they valued that real estate at a 6.8-8% capitalization; Assuming 7.5% cap rate as the mid-point would imply net rent of $62.3 million for that real estate. The Automotive Business generates over $1.8 billion of revenue and $62.3 of rent expense doesn’t seem incredibly outlandish in relation to the revenue. According to IEP, the total NAV was $5.58 billion or $15.10 per share. The stock is currently trading at $22.38 or 148% premium to NAV, which is statistically overvalued. But that doesn’t mean you should short it!
Below I show The HoldCo NAV (IEP provided side-by-side my sensitized versions). It doesn’t take a rocket scientist to figure out that the stock is overvalued. The share price is greater than 150% of IEP’s own calculated NAV. I think Icahn is smart to sell stock at such a high valuation.
IEP GAV And NAV Value (IEP Financial Statements, Presentations, and Author Estimates)
The potential for a VW Style short squeeze?
Let’s go back to 2008, when Volkswagen was trading around €200, Porsche started buying up shares until their ownership reached 42.6% and along with the State of Lower Saxony, the shares held by them equaled ~62.6%. Meaning the free float (i.e. shares that trade in the market) was only appox. 37%. This caused one of the worst short squeezes in history and the peak stock price was over €1,100.
Icahn owns 311.5 million shares or 83.37% of the company. As of May 15, approximately 4.5 million shares were short – This is only 1.23% of the shares. So not quite at VW levels but I would be worried about Icahn bidding for the remaining 17% or so he doesn’t own. At today’s share price that’s about $1.35 billion. I don’t think it happens at this price but maybe below 15, as he can pay a big premium to avoid this headache or find a buddy to help him do it.
Things Icahn can do to support the Gross Asset Value:
1. Open Icahn Investment segment up to high net worth and sovereign investors:
- I think Icahn should be able to launch a fund or SMA to manage money – He should be able to easily raise $5 billion. This would create immediate fee income and potential value from upside in the investments.
2. Monetize the Automotive Segment Real Estate:
- Sell the portfolio to a NNN REIT, who are craving yields of this type or test the CMBS market for refinancing. Hell, Icahn could use the Real Estate as collateral for an LBO.
3. Buyback Debt
- Currently the market value of the holdco bonds is trading at 86 cents on the dollar. Conducting a $1 billion tender offer for the bonds at 92 would yield bond investors a quick win and would save the company money. They would be getting about $100 million in value and would reduce annual interest cost by $59 million.
4. Sell down stake in CVR
- CVR is complicated and highly economically sensitive. It makes more sense to weigh holdings to steady cash flow companies. Selling down shares would raise immediate cash.
5. Sell Preferred Stock
- Find an investor willing to take Preferred with a heavy accrual and conversion features.
The Bonds:
IEP Capital Structure (Bloomberg)
The bonds of IEP are attractive, as they are trading at a weighted average discount of 14% to par. The 6.25 of 2026 bonds yield above 11%. Even in the downside case, after applying some discounts, the bonds have an LTV of 68% or are 1.5x by asset value.
For further details see:
Icahn Enterprises Bonds And Stock Comparison