Einhorn: Apple Preferred Stock Plan Would Unlock Value

Friday, 22 Feb 2013 09:16 AM

 

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Star hedge fund manager David Einhorn has a new product that he wants Apple Inc. to offer: the iPref.

In an unusual hour-long public conference call on Thursday, Einhorn, who has filed a lawsuit against Apple as part of an effort to get the iPhone and iPad maker to distribute more of its $137 billion cash pile, detailed the merits of distributing perpetual preferred stock to reward investors and boost a share price that he says is undervalued.

"This is not complicated, it's merely unfamiliar," Einhorn said about his perpetual preferred stock idea. "Here's the product that Apple doesn't yet know it needs," he said, a riff on the mantra of Apple co-founder Steve Jobs that consumers don't know what they want.

Einhorn's firm, Greenlight Capital, currently holds 1.3 million Apple shares, now worth nearly $600 million.

Einhorn said Apple should use $47 billion in cash to issue preferred stock with a quarterly dividend of 50 cents in perpetuity. The stock would be in high demand, he said, because "savers across the country" are in desperate need of yield.

"It has a base value of $50 and pays a dividend of $2 per year," he said. "Apple can redeem them for face value, but shareholders should not anticipate getting the face value. They should expect to receive 50 cents per quarter, every quarter, forever."

Colin Gillis, an analyst at BGC Partners, said the conference call by Einhorn, who like most hedge fund managers typically makes few disclosures about his investment views beyond required regulatory filings, was a plus for him.

"I think it helped his plight," Gillis said. "He laid out a well articulated pitch. He broke down various scenarios, showed what would happen under different cases or expected outcomes. He makes a compelling case"

As of the end of December, Apple had $137.1 billion in cash, up 68 percent from the end of its 2011 fiscal year on Sept. 24, 2011. More than two-thirds of that amount is held overseas.

Einhorn went on his public attack in early February with the suggestion for perpetual preferred stock. He then sued the company over the formulation of its proxy statement. Einhorn is seeking an injunction to block a Feb. 27 shareholders' vote on "Proposal 2" in Apple's proxy statement, which would abolish a system for issuing preferred stock at the company's discretion.

Apple has since said it will consider the idea for the stock, though CEO Tim Cook has dismissed the lawsuit over the proxy statement as a "silly sideshow."

"There are very few high-quality issuers that approach Apple's quality," Einhorn said. "IBM's paper yields the same as Microsoft's. We think Apple's should at least trade as high."

Einhorn believes iPrefs should trade at an 80-basis-point spread to 30-year Treasuries. "Over time, the iPrefs should be highly liquid. We expect the market to accept the iPrefs as a premium quality instruments."

Overall, iPref's could yield 4 percent, and to receive that "from someone who can't fail is quite exciting," Einhorn added.

Einhorn said that once iPrefs are distributed, the annual dividend payment on them would be $1.9 billion. Annual earnings per share estimates would then be reduced by $2, offsetting the amount of the dividend. For example, Apple's earnings for the current fiscal year would be $43 per share, Einhorn said.

"That would reduce the common stock price to $430," he said. "But it adds value of $50, for $480, which is $30 higher than the current stock price."

Einhorn predicts that if iPrefs were distributed at a ratio of five shares for every common stock, they would pay out $250 to investors, while lowering the stock price from $450 to $350. But when the value of the iPrefs is figured in with the new common stock price, the value would be $600 per share.

Apple's shares on Thursday closed down 0.6 percent at $446.06. The shares had traded as low as $442.82 before Einhorn's call.

"While iPref distribution combined with existing dividend would exceed existing cash flows, we think it could fund it through the existing domestic cash balance and future cash flow without ever depleting the cash balance."

© 2014 Thomson/Reuters. All rights reserved.

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