Icahn has problems?

0:06Pushkin. Carl Icahn, Wall Street legend, corporate raider, one of the most respected and most feared men on Wall Street. He's running into some trouble recently. His investment company, Icon Enterprises, the stock is down more than 50 % this year after Icon took an ill-advised bet against the U.S. stock market. Today on the show, is Icon going to be okay? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, joined today in the New York studio by two guests. Robert Armstrong, U.S. financial commentator. Yo. And Hortensa Aliyei, deputy corporate finance editor.

0:54Is that the right? That is right. Yes, okay. Sorry, I have the longest title at the FT. What don't I call? I'll call you like Wall Street old guy whisperer. How about that? Oh, yeah. Or like also one of the most feared people on Wall Street. Yeah, yeah, yeah. Another one. Oh, no, no. That's good. That's good. That's good. We are here to discuss a little bit of Wall Street history that's not gone away. Carl Icahn's still in the news, but for listeners who maybe don't know the backstory, Rob, you've been around the block back in the old corporate rating days. Tell us who this guy is. Carl Icahn is 87, so he's been around Wall Street a long time, and we were actually in the same class.

1:33At Princeton? At Princeton. That is not true. Carl Icahn is an activist investor, sort of the OG activist investor on Wall Street, famous for taking big stakes in companies including Transworld Airlines, more recently Netflix, in between Herbalife. Who else? Hortensa. Apple. Yes. So he buys these things. He makes a lot of noise and harasses them to do what he wants them to do. And then when they do it and their stock price goes up, if all goes well, he sells the company. And he's been doing this since the 80s. He is at least in part the model for Gordon Gekko of Wall Street. Greed is good. Greed is good.

2:24Amen. He is said to love the line on Wall Street. If you want a friend, get a doll. Although I will say he has a very strong reputation among journalists for picking up the phone when you call him. Yes. And we want to encourage this among all sources. And someone who has been on the phone with him recently, Ortenza, you talked to him recently about his big hedge gone wrong against the U.S. stock market. So that was it was actually my colleague Antoine. Yeah, I was helping him run the data after the short-sender report came out. But I just want to add to what Rob said on ICANN's history. So when things go bad for ICANN, no one feels sorry for him, right?

3:07Because he's sort of known for taking these big stakes in companies and then forcing them to fire people, cut costs. so when we were writing the news that things weren't looking too good there was a lot of comments on the fd website saying let me just pull out my small violin um so no one is there's a lot of schadenfreude we said feared and respected but not loved he famously got into a live on-ear screaming match with pershing square's bill ackman on cnbc and everyone just watched the fireworks it was fun but i you know you can't really say that this guy's got a lot of friends let's get down to his problems though.

3:41He's got two problems. He's got a bad short bet and he's got this allegation that his holding company is economically unsustainable. Where do we want to start on those two? We should start with the short bet because I think in many ways this is the precursor to some of the problems he's having now with Icon Enterprises. And Ortenza, you've done some very close reporting on this. About five years ago, roughly, Icon takes out this huge bet against the US stock market. He's one of these classic guys in investing who thinks the sky is about to fall. The gains we have seen in the stock market, they're just not sustainable.

4:11And he wants to protect himself on the downside. But as we now know, stocks, they mostly go up. And so, Ortenza, you've done a lot of reporting on this. This bet, this protection, this hedge against stocks falling, it doesn't go so well for him, does it? No, to say the least. No, it doesn't go well. So he basically ends up losing about$9 billion over six years. $9 billion. Yeah. Wouldn't want it to be me. Well, that would mean you to have$9 billion to lose. Exactly. Which I don't. But so he, like you said, he basically decides that the bottom is going to fall out from the market. Right. And what we've learned over the past few years is that no matter what seems to happen, stocks just don't seem.

4:53Yes, stocks just keep going up. And, you know, Icons learned that the hard way. And to his credit, when my colleague Antoine, who worked on the story with me, called him, he sort of said, yeah, I effed up. I shouldn't have had this sort of aggressive bet against the market. I went against my own rules, the sort of the things that I say, and I haven't adhered to my own advice. So he's accepted that this was a big mistake. And it was a big mistake in another way in that it drew Hindenburg, the short seller to them. Let's talk about Hindenburg because there's such an interesting part of the story.

5:29They're this short seller led by Nathan Anderson. He's kind of this Wall Street gadfly. He likes to poke people who have gotten their head a little bit too far above the parapet and who are doing things that might not be so kosher. He's taken big short positions on Nikola, the EV company that turned out was rolling their cars downhill, and Adani, the huge conglomerate in India. But Icon is another target of these short sellers. Rob, maybe you could talk just a little bit about the role of short sellers like Hindenburg, what they're supposed to do and what they've done in this case. Well, the reason that it is a good thing that short sellers like Hindenburg exist is there is tremendous incentives in the economics of Wall Street for everybody to say good things about companies and stocks and bonds and whatever.

6:18And the existence of a Hindenburg that makes its money by betting against stocks gives somebody an incentive to tell the other side of the story. And just like the cheerleaders, sometimes you can go overboard, sometimes they're right, sometimes they're wrong. But it sort of evens the playing field between the rah-rah and the boo. And in the case of Icon, this gives me an excuse to use a phrase which I've long wanted to use, which is hoisted by his own guitar. Now, Rob, you've got to be careful. Last time you used a fancy word smorgasbord on the show, we got an email about it. I got an email about it because I said smorgasbord with a G.

6:59I don't know what letter that word ends in. All apologies to our Swedish listeners. In any case, I don't even know if I'm saying petard right. In any case, here is this guy, Icon, who makes his money being a Wall Street gadfly. and he does it for a long time until along comes another Wall Street gadfly to do an icon-like move on Icon. Yeah. What did Hindenburg say about icon enterprises? Well, Hindenburg's main point is that the company's assets are overvalued, right? So a lot of these closed-end funds that are started by hedge fund managers like Carl Icon, who have, for example, Daniel Loeb, another activist investor, Bill Ackman, a former nemesis of Icons, they trade at what we call below net asset value, whereas Icons fund trades significantly above net asset value.

7:56And just to break that down, so the fund has some amount of stuff. Yes. And so where does the stock trade relative to that stuff? Does it trade at a value higher than the stuff or less than the stuff? Much higher. Yeah. So in Icon's case, it trades vastly higher. In Ackman's case and in Loeb's case, Icon's main competitors, the stock trades below the value of the stuff. So that makes Icon's - You're getting the stuff at a discount. Exactly. In Icon's case, you're paying a premium for the stuff. Yeah, exactly. So Nathan Anderson, who runs Hindenburg says, hang on a minute, why is everyone paying so much for this stock?

8:31And the reason everyone is paying so much for this stock is because this stock has an amazing dividend, right? Every year, if you're a stock holder, you get$8, which doesn't sound like a lot. But according to Hindenburg, it is the largest dividend for a large cap US company. So investors have these two incentives to invest in the Icahn Enterprises vehicle, right? One of them is you're investing alongside Carl Icahn, this legendary investor who is one of the most famous names on Wall Street. And the other is that you're getting this great dividend. But then the problem is, how do you fund this dividend, especially when you've had a sustained period of losses?

9:12Yeah. So then we get into how did Icon fund the massive dividends that he was paying his retail investors? And here you've got to get a little bit wonky, but it's strange. One of our colleagues, Bryce Elder in the FT, described it as something of a perpetual motion machine powered by share issuance. And Rob, maybe we should just break that down for the listener. What is this kind of strange Byzantine structure that he constructed? Well, I don't know how Byzantine, I think that's Byzantine, by the way. This is the mispronouncing podcast.

9:46It's not that Byzantine. I think it's simple. If you don't have money to pay the dividend to the investors from the operations of your business, you need to raise it some other way. and how they're doing it is they're issuing more shares. Yes, because their share price is really high. Yeah, exactly. It all kind of goes in a circle. You have a high share price because of the high dividend. You can't afford to pay the dividend. So you issue more shares that high share price, or at least until recently high share price, and then you have money to fund the dividend with. All of this is made possible by the fact that something like 85 % of the shares are owned.

10:24This is the tricky bit. Right. are owned by Carl Icahn and associates. And they don't take the dividend in cash. They take it in more shares. Yes. So actually, two things are happening. They're issuing more shares. The investors from the outside who buy those shares pay in cash that is then used to pay them cash out in a weird little circle. And because Icahn is taking his dividend in shares, the share count is constantly expanding even more than by just the share issuance. Yes. And it's this cycle that Hindenburg described as Ponzi-like, which you can call fair or unfair, but there's a strange circularity to the way that these dividends are funded.

11:16And whether you call it Ponzi Lake or not, there are legitimate questions about the sustainability of the dividend because that's the kind of plank on which this all rests, right? If the dividend doesn't stay as high as it is, who's buying this stock, right? And if no one's buying the stock, then the whole cycle doesn't work anymore. Totally, yeah. And just last week, Icon Enterprises cut its dividend in half, which was huge news. Eight bucks to four bucks. Yes, which is still big. You know, that's still a good dividend. So to be clear, companies do this all the time, right? Your share price goes up.

11:45you would just issue new stock, right? That's not a malfeasance. It's not a bad thing that he's doing. The problem is that the underlying assets of this company aren't performing great. So, there's a little bit of a disconnect there between the reason that everyone is buying into it and the sort of underlying fundamentals of the business. And I think that's what Hindenburg is sort of relating to. It's saying, well, actually, all of the assets, or not all of the assets, but a lot of the assets that are in this company? Are they actually performing well? And also, there's just a ton of assets that kind of are melded together, right?

12:22Yeah. The financial statements of this company are quite difficult to read. Byzantine. I'm going to let that pass. There's two things here, right? There are assets that the company owns, businesses that Icon owns just outright. There's some real estate holdings. There is a meat packaging company. There is a recently bankrupt auto parts company. There's a country club. There's a country club that's been now taken over by the members and there's some sort of pending lawsuit there. So that's just. And then there is Carl Icahn's adventures on Wall Street, his long or short bets against various companies.

13:03Reading the financial statements, It's not always easy to parse out over time which bit of money is coming from where. But it is clear from the financial statements over the last five years that there is more money going out of the business as dividends than there is coming into it from the operations and the Wall Street bets. Right. And that is a difficult issue for any company. What has Icon said about all of this? He hasn't really addressed the claim sort of one by one directly. He has said that it's a self-serving report, which, yeah, no brainer. I mean, yeah, it's a self-serving report, right?

13:41Because Hindenburg discloses at the end of it that they're shorting the company. Also, Icon himself does his self-serving reports. They're sort of both two sides of the same coin. And he has said, well, look at our performance, which is fair. Yeah, he said, if you bought our units in 2000, I think it was 2000, he said. Until today, you've beat the S &P. Yeah. I mean, if I was Icon or his PR man and I had to defend him, I would make the case like this. And they have sort of said things broadly like this in talking to investors. It's a very lumpy business. Icon takes huge bets. Sometimes they pay off huge, but it's very lumpy over time.

14:27So you might argue on behalf of Icon, we're just going through a bit of a dry patch here. And one of these bets we have going on one of these companies is going to come in big, money's going to roll into the balance sheet, and everything is going to balance again. Well, also the dividend adds a little bit of consistency, right? Because if you were just investing in a hedge fund, you would see those returns go up and down, whereas investors are getting this, at the time, 15 % yield annually. And so they get a consistent return despite whatever is happening underneath, whether it's good or not. But just to close the loop...

15:04For want of a better expression. And I think I pronounced that right. Just to close the loop, why does ICON have publicly traded shares at all? Why does it make sense for a corporate rater to have a cold company company with publicly traded shares. It is because he needs a currency to borrow against to make those big bets on certain companies. That is why he needs the stock price to be high, because that is a financing mechanism for his Wall Street adventures. But one thing that financing mechanism has financed is this terrible bet against the stock market that cost him$9 billion. Yeah. So what do we think happens next, right?

15:48Icahn's in a bit of a hole, share price is down, the dividend's been cut, he's nursing these losses from the past couple of years. I mean, do we think he's going to be able to dig himself out of this position? Look, I think the question everyone is asking, and I'm not saying he is, but the question everyone is asking is, is Icahn broke? He says, actually, I've got a few billion elsewhere. You just can't see it. Yeah. He needs a win. He needs a win. He needs a win. He needs a banger, as we would say in England. I've only got one last question to wrap up this episode. Rob, what is a petard anyway?

16:24How I picture a petard is some kind of medieval weapon that's sort of like a spear or a halberd. A halberd or a pike. And that somehow you're hoisted on it in some kind of jousting accident. How did I do? Do you know what a petard is? I have no idea. Okay. I don't know what a smorgasbord is. We don't know any of this stuff. Listeners, you should write in and tell us, what is a petard? I refuse to Google it. I just refuse. We'll be back in a moment with Long Short. Welcome back. This is Long Short, that part of the show where we go, long a thing we love, short a thing we hate. Listeners, I capitulated in the two minutes we were on break, and I did Google petard.

17:08It is a bomb. Hoisted by your own petard means you get blown away by - an explosive. Who would have thought? Not a halberd, not a pike. Not a fun way to die. No. All right. Ortenza, do you have a thing that you love or that you hate? I wouldn't say I hate them, but I am short investment bankers. Oh, snap. Uh-oh. Uh-oh. Don't you have to talk to these people on the phone all the time? Are they going to hear this? Yes. Bridge is burned live on the Unhedge podcast. Did we mention my name at the beginning of the podcast? We'll scramble it. Don't worry. Why are you short the investment banker? I think from people that I speak to, the new thing is the hotshot lawyer, right?

17:49The investment banker has been left behind. Deal making is in the doldrums. No one needs them anymore, apparently. And now the new cool thing to be is a corporate lawyer. Who would have thought? I can hear a shudder passing through East Hampton as you say those words. I like this pair trade, long corporate lawyer, short investment banker. That's a good one. Rob, do you have a long or a short? I am long, thank God, Opemipo Matthew Yeye. He is one of four Nigerians who were in a desperate situation in their home country. And in a bid for a better life, a couple of weeks ago, they climbed onto the rudder of a huge cargo ship, not even knowing where it was going.

18:35Okay. And two weeks later, after running out of food and water a week into the trip, they arrived in Brazil. And let me just say, any man or woman who's willing to roll the dice like that in a bid for a better life, I am long all day. Yes, sir. That's an amazing story. And finally, some uplifting news on this often depressing podcast. All right. Thanks, Robin Ortenza, for being here. Listeners, we'll be back in your feed on Tuesday with another episode of Unhedged. Catch you then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges.

19:24Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, and Jess Trulia. FT Premium subscribers can get the Unhedged newsletter for free. A 90-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.

20:00Thank you.