About iCahn's AAPL Activism, And Those AAPL Bonds

Tyler Durden's picture

While we congratulate Carl Icahn (or is that iCahn) for once again taking over the spotlight in what has otherwise been a newsflow empty summer doldrum week, and like everyone else, are surprised by his most recent activist target, the country's on-again, off-again most valuable by market cap company, Apple, we do, as we did before when David Einhorn proposed virtually the same activist play, have some questions. Chief among them: how will AAPL fund any proposed expanded buyback or increased dividend using domestic cash?

As a reminder, from the recent 10-Q, where the company discusses its uses of cash, we learned that these were primarily "used to repurchase common stock of $18 billion," and "to pay dividends and dividend equivalent rights of $7.8 billion." We also know previously that a large portion of the use of cash came from the Company's issuance of $17 billion in US-based bonds on April 30. Yet when netting out all other domestic cash flows, the company ended up burning a total of $2 billion in the quarter, as its domestic cash balance fell for the second consecutive quarter to $40.6 billion even as foreign cash rose to a record $106 billion. Alas, as everyone knows, for shareholder friendly activity, the offshore cash is essentially worthless unless it is repatriated and subject to very generous taxation by Uncle Sam: something we doubt Tim Cook would be happy with.

So how would AAPL fund any additional activist shareholder-friendly forays. Well, the only way it can: by issuing more bonds.

And therein lies the rub: as the chart below shows, the bonds which were issued on April 30 at par are now trading some 10% lower, primarily as a function of duration and the recent surge in interest rates - a surge which the Fed promises will be moderated, but ultimately continue as the "economy improves."

So the question becomes: for Icahn to make a quick buck some bondholder somewhere would have to be willing to lose an even quicker buck. Who will that someone be, especially if Jefferies, traditionally a willing partner to Icahn to underwrite a highly confident debt issuance letter, is unable to find the greater fool all the more so since AAPL is not a high yield issuer, at least not yet?