Billionaire and activist investor Carl Icahn has written a letter to Apple’s CEO Tim Cook again pushing to significantly increase its share buyback program.
Icahn has published the letter on Shareholder’s Square Table website.
Carl Icahn who now holds a $2.5 billion in Apple stock, had met with Apple CEO Tim Cook over dinner to talk stocks, money and the future of Apple earlier in the month. At that time, he talked to Apple CEO Tim Cook about a $150 billion stock buyback, citing Apple’s ability to borrow money cheaply right now as a compelling factor to initiate the aggressive buyback program.
In the letter Icahn also notes that he has increased his stake in the company by 22% since meeting Tim Cook. Here’s an excerpt from the letter:
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. [..]
[..] 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. [..]
[..] 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.
Meanwhile, billionaire Bill Gross, and manager of PIMCO, the world’s largest mutual fund, isn’t too happy with Icahn’s strategy and has said he “should leave Apple alone.”
— PIMCO (@PIMCO) October 24, 2013
Icahn is known for his ability to be a thorn in the side of a company. He fought Michael Dell’s effort to take the computer company private though unsuccessfully and is also credited with pushing Motorola to split up and sell its mobile business to Google.
You can read the entire letter at Shareholder’s Square Table website.