The stock of activist investor Carl Icahn’s company fell 20% after Hindenburg Research, a short trader whose studies on companies have wiped a significant portion of their value, criticised Icahn Enterprises LP (IEP) (IEP.O) on Tuesday on the reporting of its finances.
The development provides a unique problem for Icahn, who is used to criticising firms’ governance and openness as one of the founders of shareholder activism but has never had to do so himself.
Hindenburg accused IEP with overvaluing its shares and using a “Ponzi-like” framework to pay dividends in a report released on Tuesday.
Icahn’s net worth was reduced by $2.9 billion as a result of the subsequent IEP stock decline, leaving him with a projected $14.7 billion, based on Forbes.
In a statement issued by IEP, Icahn stated that Hindenburg’s self-serving assessment was intended to make money at the expense of the company’s long-term shareholders.
Icahn makes a variety of investments in the energy, automobile, real estate, food packaging, and other industries through his Sunny Isles Beach, Florida-situated corporation. With an 85% ownership position, he is IEP’s controlling stakeholder.
Hindenburg declared that IEP trades at an average of 218% premium to its most recent net asset value (NAV), far beyond all equivalents, and that IEP’s units are overpriced by more than 75%.
On the other hand, Hindenburg noted that IEP’s rivals trade below their respective NAVs, including Dan Loeb’s Third Point Investors Ltd (TPOGu.L) & Bill Ackman’s Pershing Square Holdings Ltd (PSH.AS). A vital indicator of a fund’s success, NAV calculates the market value of the assets the fund owns.
IEP’s stock is irrationally frothy, according to Hindenburg, because of its dividend yield of around 15.8%, which is by far the highest of any American large size firm.
Hindenburg charged Icahn with inflating the dividend yield by forcing IEP to sell additional shares in order to pay out dividends to shareholders and getting his own dividend in fully stock rather than cash.
According to Hindenburg, Icahn has been utilising funds raised from new investors to distribute dividends to existing investors.
In addition, Hindenburg provided instances it claimed demonstrated IEP was placing a much higher value on its stocks than was appropriate.
Hindenburg, citing IEP’s records, claimed Viskase Companies Inc. (VKSC.PK), a company that packs meat, had a market value of barely $89 million at the end of the year despite owning 90% of the company.
Shares of Viskase are traded on a pink-sheet. IEP claimed in a filing that a lack of significant trading volume was the cause of the value mark-up using market comparables.
Another example is when IEP valued its automotive components division at $381 million in Dec of 2022, a month before a major subsidiary of that division declared bankruptcy the following month.
IEP’s auditor since 2004 Grant Thornton LLP refused to comment through a spokesman.
The close bond among Icahn and the investment firm Jefferies Inc (JEF.N) was another target of Hindenburg.
The short seller drew attention to the fact that Jefferies, the only significant brokerage to cover IEP, bases its equities research on the assumption that Icahn’s dividends will always be paid, even in the worst-case scenario, while also making money by orchestrating the selling of IEP’s stock.