Jefferies is the only Wall Street house that currently covers Icahn Enterprises LP (IEP). It was also involved in managing continuous offerings, i.e., at the money offerings (ATM), of IEP worth about $1.7 billion. Icahn and Jefferies have a long history and Icahn bailed out Jefferies (JEF) when it got into illiquid sovereign debt issues which were falling fast in value (read Hindenburg's tweets). So the two have been scratching each other's back for a while.
Another sell-side firm that used to cover IEP was UBS, which dropped coverage in January 2020 citing “lack of transparency, limited float …” among some of the reasons: of course one inevitable result of the lack of transparency was the significant premium above the net asset value at which IEP was trading. That premium was only about 60% according to UBS in early 2020.
Hindenburg calculates the fair value of IEP's current NAV at $4.4 billion. IEP's market cap is $14.3 billion right now, after falling from $18.6 billion prior to Hindenburg's report. Based on market cap, IEP is trading 325% above Hindernburg's estimated NAV.
IEP has also been paying out $2 per share in dividend which, annualized, is $2 x 4 = $8; $8 divided by current stock price of $40.36 = 20%. This was apparently a big lure for the retail money: IEP was paying out divvies like certain Brazilian conglomerates. However, if IEP was properly marked to market at $4.4 billion, which is equivalent to a stock price of only $12.44, then the dividend yield jacks up to $8 / $12.44 = 64.3%. Clearly unsustainable but enabled for the moment by JEF's management of IEP's ATM offerings (hence the accusation, “malpractice”). The inordinate dividend will have to be cut as the market continues to tank and Icahn's market bets have soured — he was shorting in 2022, which should have made him money. But he was apparently shorting the wrong stocks, and was on track to lose more than $250mm, ouch.
Forbes estimates Icahn has 85% of his wealth tied up in IEP, so he can't really deploy further capital into IEP, Hindenburg reckons. Also, IEP is hobbled by too much leverage — net debt of $5.2 billion. When IEP's market equity drops to $4.4 billion, that translates to 54% debt in the capital structure — this will surely kickstart covenant breaches in some debt indentures. Things won't end well for Icahn, thinks Hindenburg. Bill Ackman is piling in, rubbing in, and observing, “There is a karmic quality to this short report that reinforces the notion of a circle of life and death. As such, it is a must read.”
Incidentally JEF is a Buffett stock but he has a very small stake (for BH) in the brokerage company: only $15 million. This does not mean the rest of the Wall Street gang is honest: they just don't cover something that smells egregiously bad. But there is enormous latitude in coverage and in giving out buy and overweight ratings to overvalued stocks: “Put some lipstick on this pig.” Vermillion.
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