On the eve of
Apple's
(AAPL)
earnings call Monday, activist investor Carl Icahn is pressuring CEO
Tim Cook for an "unprecedented" $150 billion stock buyback that Icahn
says would nearly double the value of Apple shares.
Icahn recently increased
his stake in Apple by 22 percent -- from 3.87 million shares to 4.73
million shares -- and on Thursday unveiled a letter he wrote to Cook
calling for the stock buyback.
Icahn's proposal would
come on top of Apple's current plans to repurchase $60 billion worth
of shares over three years.
In the letter that he
posted on his new website, www.shareholderssquaretable.com, Icahn
called Apple's $60 billion buyback "simply not large enough."
Shares of Apple closed at
$531.91 Thursday, but Icahn wrote to Cook that a $150 billion stock
buyback would drive Apple shares up to $1,250.
With $147 billion in cash
on Apple's books, Icahn wrote, "we find it difficult to imagine why
the (Apple) board would not move more aggressively to buy back stock
by immediately announcing a $150 billion tender offer (financed with
debt or a mix of debt and cash on the balance sheet).
"While this would
certainly be unprecedented because of its size, it is actually
appropriate and manageable relative to the size and financial strength
of your company," he continued.
Apple did not respond to
a request for comment.
Icahn's letter followed a
dinner meeting he had in September with Cook.
Icahn, who owns an
estimated 9 percent of Dell, had been fighting to keep Dell public.
But around the same time as his dinner meeting with Cook, Icahn wrote
an open letter to Dell shareholders saying he no longer would
challenge a buyout proposal from company founder Michael Dell and
Silver Lake Partners.
Scott Rothbort, president
of LakeView Asset Management, said Icahn's strategy with Apple is
different from his intentions with Dell.
With Dell, Icahn "wanted
to take over a company and install new management and re-engineer the
company from top to bottom," Rothbort said. "With Apple, all he's
saying is he wants to re-engineer the bottom line."
"If Tim Cook looks at him
in a mentor role, as an elder statesman, it will be beneficial,"
Rothbort said.
But Gary Lutin, chairman
of The Shareholder Forum, was involved with Icahn's efforts in the
Dell takeover and warned Apple and its shareholders to regard Icahn
with caution.
With Dell, Lutin said,
"he got a lot of people to follow him, then he negotiated a settlement
and didn't share whatever he got with them."
"He's making proposals
the way he did with Dell," Lutin said. "He makes a proposal that
appears to appeal to a large number of active traders as something
that represents a potential value increase. And he knows that when he
gets on TV, the stock price continues to fluctuate in a predictable
manner and he's going to make a profit on that."
Contact Dan Nakaso at
408-271-3648. Follow him at Twitter.com/dannakaso.
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Activist
investor Carl Icahn posted a letter to
Apple (AAPL)
CEO Tim Cook on his new
Shareholders Square Table website on Thursday, urging a $150
billion stock buyback to boost the price of Apple shares. Here is
the text of the letter:
"Dear
Tim:
It was
a pleasure meeting you for dinner at the end of September. When we
met, my affiliates and I owned 3,875,063 shares of Apple. As of
this morning, we owned 4,730,739 shares of Apple, an increase of
22% in position size, reflecting our belief the market continues
to dramatically undervalue the company, even when taking into
account the recent market appreciation, which in turn makes our
proposal unchanged with respect to a $150 Billion buyback. We were
pleased to hear at our dinner that you appreciated our input and
that you would speak to us again in three weeks to continue the
dialogue. In anticipation of doing so soon, we aim to reiterate in
this letter the point of view already expressed to you directly
with the hope of effectively summarizing it for the company's
board of directors and our fellow shareholders.
From
our perspective, Apple is the world's greatest consumer product
innovator and has one of the strongest and most respected brand
names in history. We consider Apple to be our most compelling
investment. I first informed my followers on
Twitter on August 13, 2013 of my "large position." I also
expressed to you my opinion that "a larger buyback should be done
now." At that time, we owned 3,448,663 shares and the stock price
was $467. Since then we have purchased an incremental 1,282,076
shares (bringing the total value of my position to $2.5 Billion)
and we currently intend to buy more.
We want
to be very clear that we could not be more supportive of you, the
existing management team, the culture at Apple and the innovative
spirit it engenders. The criticism we have as shareholders has
nothing to do with your management leadership or operational
strategy. Our criticism relates to one thing only: the size and
timeframe of Apple's buyback program. It is obvious to us that it
should be much bigger and immediate.
When we
met, you agreed with us that the shares are undervalued. In our
view, irrational undervaluation as dramatic as this is often a
short term anomaly. The timing for a larger buyback is still ripe,
but the opportunity will not last forever. While the board's
actions to date ($60 billion share repurchase over three years)
may seem like a large buyback, it is simply not large enough given
that Apple currently holds $147 billion of cash on its balance
sheet, and that it will generate $51 billion of EBIT next year
(Wall Street consensus forecast).
The S&P
500 trades at roughly 14x forward earnings. After backing off net
cash, Apple trades at just 9x (not factoring into account that the
company has a significantly lower cash tax rate than the rate Wall
Street analysts use). This discount (cash adjusted) becomes even
more compelling given our confidence that Apple will grow earnings
per share at a rate well in excess of the S&P 500 for the
foreseeable future. With such an enormous valuation gap and such a
massive amount of cash on the balance sheet, we find it difficult
to imagine why the board would not move more aggressively to buy
back stock by immediately announcing a $150 Billion tender offer
(financed with debt or a mix of debt and cash on the balance
sheet).
While
this would certainly be unprecedented because of its size, it is
actually appropriate and manageable relative to the size and
financial strength of your company. Apple generates more than
enough cash flow to service this amount of debt and has $147
billion of cash in the bank. As we proposed at our dinner, if the
company decided to borrow the full $150 billion at a 3% interest
rate to commence a tender at $525 per share, the result would be
an immediate 33% boost to earnings per share, translating into a
33% increase in the value of the shares, which significantly
assumes no multiple expansion. Longer term (in three years) if you
execute this buyback as proposed, we expect the share price to
appreciate to $1,250, assuming the market rewards EBIT growth of
7.5% per year with a more normal market multiple of 11x EBIT.
It is
our belief that a company's board has a responsibility to
recognize opportunities to increase shareholder value, which
includes allocating capital to execute large and well-timed
buybacks. Apple's Board of Directors does not currently include an
individual with a track record as an investment professional. In
my opinion, any further delay in executing the buyback we hereby
propose will reflect this lack of expertise on the board. My
firm's success and my expertise as an investor would be difficult
for anyone to argue. Per my investment thesis, commencing this
buyback immediately would ultimately result in further stock
appreciation of 140% for the shareholders who choose not to sell
into the proposed tender offer. Furthermore, to invalidate any
possible criticism that I would not stand by this thesis in terms
of its long term benefit to shareholders, I hereby agree to
withhold my shares from the proposed $150 Billion tender offer.
There is nothing short term about my intentions here.
Sincerely,
Carl
Icahn
Chairman, Icahn Enterprises (IEP)" |
