Analysis: Icahn's mark-up of meat packager extraordinary but possible, experts say
05/05/2023 11:00
By Koh Gui Qing
NEW YORK, May 5 (Reuters) - As investors and financial
experts pored over Hindenburg Research's allegations against
activist investor Carl Icahn's holding company this week, one
easy-to-verify claim stood out in the short seller's report.
Hindenburg said Icahn Enterprises LP (IEP) IEP.O valued a
meat packing company in which it owns a 90% stake three times
over its market value.
An IEP regulatory filing from March shows that it indeed
valued Viskase Co Inc VKSC.PK as a subsidiary at $243 million
as of the end of December, when the market capitalization of the
company was just $88.7 million.
IEP cited "the lack of material trading volume" in Viskase's
stock as grounds for the valuation mark-up in the filing.
Viskase's shares are traded in the over-the-counter market
rather than a major exchange such as Nasdaq or the New York
Stock Exchange.
Four corporate finance experts and two former U.S.
Securities and Exchange Commission (SEC) officials interviewed
by Reuters said IEP's valuation mark-up of Viskase was
extraordinary, yet market rules allowed for it as long Icahn's
firm disclosed it and could justify it.
"I have never heard of a 200% premium," said Anant Sundaram,
a business administration professor at Tuck School of Business
at Dartmouth College. "If there was an illiquidity premium, it
has to be disclosed and it has to be founded in empirical
evidence."
Icahn, who earlier this week called Hindenburg's report
"self-serving" and said IEP stands by its disclosures, did not
respond to a request for comment.
Viskase, Hindenburg and the SEC, which is responsible for
policing the disclosures of U.S. companies, also did not respond
to requests for comment.
IEP's shares have lost 40% of their value -- some $7 billion
-- since Hindenburg published its report on March 2. One of
Hindenburg's main claims is that IEP's payouts to shareholders
are unsustainable. It said that Icahn's practice of getting paid
dividends from his 85% stake in IEP in stock and IEP itself
selling stock to raise cash constituted a "Ponzi-like" structure
that artificially inflated the company's dividend yield.
IEP responded by pointing to $2 billion in cash on its
balance sheet as evidence of its financial strength and said its
performance will speak for itself over the long term "as it
always has". On Thursday, IEP said after the stock market closed
that it would preserve its dividend at $2 per unit for the first
quarter. IEP's stock rose 10% in afterhours trading on the
announcement.
HIGHER VALUATION MULTIPLE
IEP is scheduled to report its first-quarter earnings on May
10. Joseph Peiffer, a securities lawyer in New Orleans with
Peiffer Wolf Carr Kane Conway & Wise, said IEP should be ready
to show its valuation of Viskase was carried out "on a good
faith basis".
"It's supposed to be mark-to-market, not mark-to-fantasy,"
Peiffer said. "You want to understand why something is marked
the way it is."
IEP said in its filing it valued Viskase at nine times its
adjusted 12-month earnings before interest, taxes, depreciation
and amortization (EBITDA). Based on its stock price, Viskase is
valued at only 5.4 times its adjusted 12-month EBITDA, according
to Refinitiv Eikon. Its peer group's average is 7.6 times.
IEP did not provide an explanation for its use of the nine-
times multiple.
Viskase, which is based in Lombard, Illinois and accounts
for only a small slice of IEP's value, makes food packaging such
as casings for sausages.
Krishna Palepu, a professor at Harvard Business School, said
while it was possible to ascribe premiums to activist investors'
holdings of companies on the basis that their control adds
value, such mark-ups typically ranged between 20% and 30%.
"I have not run into 200% premium before," he said.
(Reporting by Koh Gui Qing in New York
Additional reporting by Chris Prentice in Washington, D.C.
Editing by Greg Roumeliotis and Sam Holmes)
((guiqing.koh@thomsonreuters.com; +1 646 223 6033;))