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?