Toward the end of January, billionaire Carl Icahn announced that he'd acquired 5.6% of Transocean (NYSE:RIG) and would be asking the company to consider several proposals, including the return of capital to shareholders. Although Icahn indicates there won't be a formal bid for the offshore driller, you have to wonder if he's just being polite. Whatever he's got up his sleeve, I'll look at whether it's a good thing for shareholders.
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Most investors are familiar with Icahn because of his 10% investment in the video streaming service. Icahn announced back in November that he'd picked up 10% of Netflix for $58 per share. He figured the company was undervalued. Netflix founder and CEO Reed Hastings brought out excellent fourth-quarter earnings on Jan. 23; Icahn's now sitting on an unrealized profit of $503 million as of Feb. 4. That's a pretty good chunk of change. However, a passive investment is entirely different from owning a company outright. Icahn's had numerous aborted takeover bids in recent years. Although many will question his ability to carry the ball all the way into the end zone at the age of 76, his business has plenty.
Icahn Enterprises (Nasdaq:IEP)
If you're worried about Icahn following through, you needn't be. His publicly traded company has the majority control of seven reasonably large businesses in seven different industries. He's perfectly capable of getting the deal done. Last year, he acquired 82% of CVR Energy (NYSE:CVI) for $2 billion. Those shares are now worth $3.8 billion. CVR Energy spun off its refining business on Jan. 16 at $25 per share. Eighteen days since its initial public offering, CVR Refining (NYSE:CVRR) has delivered a 16% appreciation and approximately $400 million in unrealized gains for Icahn. The man knows how to make his own luck. I believe his involvement with Transocean will be a good thing because its stock has basically done nothing except drop in value or tread water since the Deepwater Horizon drilling rig sank in April 2010.
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Return of Capital
In addition to seeking seats on the board, Icahn calls for a dividend of $4 per share as well as official meetings to discuss its business strategy. When you consider that Transocean's stock has lost 34% of its value since April 20, 2010, a substantial dividend would send a message to investors that the company is owned by the shareholders and not management. At current prices, it's a 7% dividend yield, far superior to the annualized loss of 14% over the past 33 months. Under Swiss law, Icahn can propose a dividend at its annual meeting in May. If a majority of shareholders support the proposal, the dividend would be declared regardless of management's approval. It's hard to imagine this being turned down by shareholders, so I'd expect management to propose something similar by the end of April.
Master Limited Partnership
In October, Stavangar, Norway-based Seadrill (NYSE:SDRL) created Seadrill Partners (NYSE:SDLP), a master limited partnership (MLP) that would acquire, own and operate drilling rigs for use by other oil companies. It did this to raise cash for the parent while also creating a tax-free structure to carry out its growth plans. Icahn will likely want a similar structure set up for Transocean. The most attractive part of Seadrill Partners' MLP is that less than 20% of its annual distribution of $1.55 is taxable as dividends, with the remainder considered return of capital. That means its after-tax yield is currently around 5.3% and is likely to rise. For income investors, it's certainly worth considering.
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The Bottom Line
According to Bloomberg, Transocean's current net asset value is 20% higher than its stock price. Historically, the stock price of companies in the Philadelphia Oil Service Sector Index has averaged more than 100% of net asset value, suggesting that Icahn sees an incredible value in Transocean and is simply ensuring his investment achieves the return he believes it should. Current shareholders should be very pleased that he's pushing for change. In this case, it seems long overdue.