Activist Investor Carl Icahn Has A Huge Problem Brewing

Usually Icahn is the one casting doubt about the validity of other companies.

Carl Icahn is a legendary figure on Wall Street as an activist investor, but now Icahn Enterprises IEP is facing its own pressure from short seller Hindenburg Research.

The firm took a short position against the company and its $18 billion market cap, calling the holding company's economic structure "ponzi-like"  while saying it has uncovered "clear evidence" that its valuation is inflated by at least 75%. 

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"Despite Icahn’s career of heavily publicized activist wins, his recent performance has suffered. Icahn’s last year of significant outperformance was in 2013, when Icahn’s investment fund returned 30.8%," Hindenburg's note said. 

"Since 2014, Icahn’s public market investment portfolio, which comprises 45% of IEP’s gross indicative assets (i.e., excluding holding company cash & debt) has lost 53%. In the same period, the S&P returned 147%."

The firm goes on to say that the dividends IEP pays out are "mathematically unsustainable" due to the fact that $1.5 billion in cash dividends have been paid since 2014 despite negative free cash flow of $4.9 billion during that period. 

In just the past four years, the company has paid out $980 million in cash dividends to its stockholders despite burning through $1.6 billion in free cash flow. 

"The company has supported its dividend and declining asset values by selling $1.7 billion through ATM (at the market) unit sales over the past four years... In short, Icahn has been using money from new investors to pay out dividends to old investors," the note stated. 

The full Hindenburg Research note can be found here.