Description

For shorts we like to look for outliers that haven't fallen like peers.  A prime example of this is Icahn Enterprises (IEP), a public LP investment vehicle run by Carl Icahn (note: its investments are both into Icahn's fully owned hedge fund + individual securities that have been moved over, many times post catalyst, to the IEP vehicle).  Looking at the Pershing, Greenlight and Third Point vehicles (albeit via Reinsurance, so actually more tax efficient with cheaper leverage) - these three in general are trading between 15-4% discount to NAV.  IEP, by contrast, is trading at a 50% premium to NAV.

Looking at IEP's 12/31/15 NAV, it is composed of:

Holdings in Icahn's Funds $3.4bn

CVR Energy                    $2.9bn (based on 12/31 share price)

FDML                              $.95bn

ARII                               $.55bn

Total at Market:              $7.8bn (12/31)

Other subsidiares valued by Icahn

Tropicana                     $800mm valued by Icahn (though only $300mm if valued at market - I'd note the interesting recent writeup posted on VIC)

Viskase                        $180mm (though $80mm if valued at market, probably worthy of looking at if you have a p.a. I'd note)

Real Estate                   $650mm

PSC Metals                   $180mm

WestPoint Home           $180mm

AEP Leasing/ARL           $850mm (valued at the PV of cash flows + working capital - which I think is much higher than it would trade in the public markets...)

Ferrous Resources       $95mm

IEH Auto                     $250mm

Total Subs:                $3.2bn

+ Cash                      $166mm

- Holdco Debt            -$5.5bn

Other Assets              $615mm

Total NAV at 12/31 per share:  $48 per IEP calculations

Now the interesting part is to see think about how much lower this is today.

I'd note that the Q4 hedge fund returns for Icahn were -15%, and he got heavily net short earlier this qtr - so likely not a pretty quarter again.  This would lead to highlighting that the 3 other comps above saw deterioration in the premium of the stocks as the funds underperformed - which should also weigh on IEP. We estimate that Icahn's hedge fund holdings (per his 12/31) weighted average long is flat for the year. The market is up somewhat (+ fees / transaction costs), making the shorts likely a drag, but for simplicity will say that the hedge fund is flat.

ARII is down 12%, dropping $65mm from NAV

CVI is down a whopping 34%, dropping $1bn from NAV

FDML is up 43% (thanks to a bid by Icahn), adding $400mm to NAV

So, just given these changes, NAV drops to $43. IEP has also paid a $1.5 dividend, so drops NAV to $41.50.  I conservatively round down to just $40 because 1) Values some securities at much higher than market, 2) I think ARII would trade much lower without IEP owning so much of the float (and likely same for CVI), 3) Fees, 4) Interest expense on debt, 5) I question that value of AEP Leasing given the big discount to NAV other leasing companies trade at (like TRN).

Assuming IEP trades to NAV, the stock would drop from $63.3 to $40 (37% downside).  I think that there is even more risk here as IEP's debt is now rated junk, and any sell-off in the market could create financial distress, selling mark-to-market illiquid assets at a lower level, and/or forced selling of essentially controlled securities (CVI, FDML, ARII).

A major risk is that Icahn could buy in everything, however, he doesn't have a history of paying $1.6 for $1 worth of value.  Other risks are that his securities outperform. The borrow is difficult but acheivable, watch out around ex-dates.

Catalyst

Dividend Cut

Icahn retires (he is 80 years old) and names sub-par replacement

Liquidation at NAV ($40)

Continued weak investment results erodes premium

Financial distress from overlevered b/s in a market downturn

Energy re-meltdown (given high energy exposure)