In a press release that just came out, hedge funder David Einhorn told shareholders to vote AGAINST a proposal from Apple that would eliminate the company’s ability to issue preferred stock that paid a dividend.In the letter he reveals that he’s been talking to Apple about doing more to unlock the $137 billion that it holds on its balance sheet. And he believes that by using preferred stock, Apple could get a lot more credit for the cash it holds.
This is a frustration of a lot of investors. Apple has all this cash: Why isn’t the market valuing it more?
Anyway, here’s how Einhorn says Apple could create hundreds of billions worth of value in a snap:
For example, Apple could initially distribute to existing shareholders $50 billion of perpetual preferred stock, with a 4% annual cash dividend paid quarterly at preferential tax rates. Once a trading market is established and the market recognises the attractiveness of a highly liquid, steady yielding instrument from an issuer backed by Apple’s unmatched balance sheet and valuable franchise, the Board could evaluate unlocking additional value by distributing additional perpetual preferred stock to existing shareholders. With this conservative action, Greenlight believes the Board could unlock hundreds of billions of dollars of latent shareholder value.
Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4%, our calculations show that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share. Further, Greenlight believes additional value may be realised when Apple’s price to earnings multiple expands, as the market appreciates a more shareholder friendly capital allocation policy.
Einhorn is on CNBC talking about this, and he says that this solution would allow Apple to keep its cash hoard for whatever it wants, while also creating an instrument that monetizes it, creating instant value for shareholders. He describes it as a win-win.
Hosts on the show asked him why this couldn’t be accomplished just with a big share buyback or higher dividend. Einhorn’s suggestion was that that would require Apple to part with more cash instantly than it was comfortable with. He claims that the creation of a special class of shares would create instant value, while also allowing Apple to hold onto most of its cash.
Specifically, he said on CNBC when asked why not do buybacks:
This is better. This is way better because this doesn’t actually require them to use any of the cash right away. They would be able to maintain their cash chest and all of the strategic ideas and at the same time shareholders would be rewarded with something that gives them credit for Apple’s phenomenal balance sheet and franchise value.
Bear in mind, this idea only works if you believe that current equity investors aren’t properly valuing the cash. If you think current equity does properly take the cash into account, then just moving this cash towards preferred stock doesn’t do anything. You can’t create money out of nothing.
On CNBC he says that he’s more long Apple than he ever has been before.
More broadly, it’s remarkable that Apple, which was once an invincible high-flyer, is now being targeted by angry hedge funders.
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