updated 10:52 am EDT, Thu October 24, 2013
Investor ups stake to $2.5 billion
As promised yesterday, influential investor Carl Icahn has published the contents of a letter sent to Apple CEO Tim Cook. The letter asks Apple to pursue an "immediate" $150 billion share buyback program, expanding on the $60 billion program the company is already engaged in. The latter is due to finish by the end of 2015, and has required Apple to go into debt despite tens of billions in cash reserves.
"When we met, you agreed with us that the shares are undervalued," Icahn's letter reads. "In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever. While the board's actions to date ($60 billion share repurchase over three years) may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion of EBIT next year (Wall Street consensus forecast).
"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," he continues. "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."
Icahn notes that he wouldn't actually participate in the buyback, since there is "nothing short term about intentions." Reports observe, though, that he has increased his stake in Apple from $1.5 billion to $2.5 billion. Inflating the value of Apple stock would increase the value of that portfolio, and allow him to make more money from periodic selloffs.