NEW YORK – FEBRUARY 7: Carl Icahn looks at charts on a projection screen during a media conference at the St. Regis on February 7, 2006 in New York City. Lazard issued a report on Time Warner at this conference. Icahn is seeking to overthrow Time
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Shares in Icahn Enterprises fell 20% yesterday after short seller Hindenburg Research took aim. Here’s how Icahn’s fortune could fall even more.
Legendary corporate raider and activist Carl Icahn finds himself on the wrong side of a familiar battle.
Short selling investment firm Hindenburg Research, led by 38-year-old Nate Anderson, took aim at the 87-year-old Icahn’s publicly traded holding company, alleging in a new report that Icahn Enterprises L.P. (IEP) is overstating the value of its private asset portfolio, and that its publicly traded stock units–85% of which Icahn owns–are “significantly overvalued.”
Icahn’s fortune fell over 35%, from $18.3 billion on Monday afternoon to $12 billion as of Tuesday’s market close. Icahn Enterprises units tumbled 20% on Tuesday, shaving $3 billion in market value off Icahn’s fortune. Forbes then trimmed Icahn’s estimated net worth by another $3.6 billion, after it was revealed that Icahn had pledged over half of his IEP shares as collateral against unknown personal debts.
Icahn brushed off Hindenburg’s report in a press release as “self-serving” and “intended solely to generate profits on Hindenburg’s short position at the expense of IEP’s long-term unitholders.”
Now comes a moment of reckoning for Icahn who has to keep outside investors from losing faith in his business. Since Icahn holds 85% of his company’s publicly traded units, 15% of his company’s market cap–equal to about $2.1 billion of share capital–is held by its retail investor base. That low public float has helped drive up the firm’s unit prices, but it also exposes Icahn’s 85% stake to a potentially rapid decline in value.
Plunging unit prices could also burn Icahn’s fortune by disrupting his borrowing activities. Icahn had pledged 181.5 million units of Icahn Enterprises–out of the 300 million units he holds– to “secure certain personal indebtedness,” as of the end of 2022, according to its annual report. This “risky form of financing… could result in margin calls should unit prices decline,” Hindenburg warns.
However, it’s not clear how much debt Icahn has taken out against his IEP units. Icahn Enterprises states that Icahn has “sufficient additional assets to satisfy any obligations” from his margin loans, and that Icahn is “current on all principal and interest payments with respect to the loans, and there has never been an event of default” on those liabilities. Icahn could not be reached for comment on his debt load as of press time.
Unlike some companies which permit share pledging but place restrictions on how much executives can borrow, Icahn Enterprises does not disclose any limits on Icahn’s borrowing in its financial filings. Icahn could, theoretically, have several billions of dollars in outstanding loans secured against his pledged 181.5 million units. These units were worth over $9 billion before yesterday’s crash. (Margin loans are typically between 25% to 75% of the collateral’s value).
“We view it as critical that Icahn disclose the key terms of these margin loans so that investors can understand the potential risk of a margin call and forced asset sale,” Hindenburg noted in its report.
A deep enough plunge in Icahn Enterprises’ unit prices would force Icahn to pay down his loans’ principal, or post additional stock units as collateral to Morgan Stanley (which is the counterparty to Icahn’s margin loans, according to state filings in Florida and Delaware identified by Hindenburg).
Of course, Icahn is hardly the only billionaire to use his publicly traded company as loan collateral. Elon Musk has pledged Tesla stock to help finance the expansion of his private business empire. Larry Ellison, cofounder of software giant Oracle, has been pledging Oracle stock since at least 2007, after the Securities and Exchange Commission began requiring disclosures. A Forbes report from November 2021 found that at least 32 of the 400 wealthiest Americans (to feature on that year’s Forbes 400 list) were pledging shares of their publicly traded companies to take on personal debt.
Yet, most larger companies don’t allow pledging: Over two-thirds (68.4%) of S&P 500 companies ban all company employees and shareholders from pledging shares for debt, 22% prohibit pledging but with exemptions for certain individuals, and only 3.4% fully permit it, according to a data set from proxy advisory firm Institutional Investors Service.
And with good reason, says Jun Frank, an executive director for ISS’ corporate solutions group: “When executives or directors have a significant percentage of their equity pledged, it creates a concern from the investor perspective,” Frank told Forbes in 2021. Perhaps Icahn Enterprises investors would have done well to listen.