Icahn Versus Frost
Never one to shy away from the media regarding his investments, Carl Icahn has been particularly in the limelight recently even for his standards. This in part prompted an even closer scan of his portfolio, trying to find an investment opportunity in a company in which he both has a significant position and has been relatively quiet regarding his stake. In this type of scenario, the slightest mention from Icahn regarding any course of action could be a significant catalyst in itself. I found just this opportunity with Cadus Corp (OTC:KDUS) and have since accumulated a position. This particular investment is actually reminiscent to me of that of another billionaire investor who has garnered much attention on Seeking Alpha, Phillip Frost. In addition to my analysis of the investment opportunity presented by Cadus, a comparison of Icahn and Frost further amplifies why I believe Cadus could deliver a hefty multiple of a return if and when the right catalyst takes place. Investing in Cadus is comparable to investing in Icahn for cash, something that is not even possible with Icahn Enterprises (IEP) as it currently trades at a premium to Net Asset Value.
Coming from different backgrounds and fields of expertise, Icahn and Frost have both amassed multi-billion dollar fortunes due to their high degree of investor acumen. Icahn checks in on the Forbes 400 list at #18 with a net worth over $20 billion, while Frost is not too far behind showing up at #166 on that list with a net worth of $3 billion. Both of their fortunes have seen nice boosts this year as Icahn Enterprises is up 151% in 2013 and Frost's primary holding, Opko Health (OPK), is up 115%.
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Both are generally outspoken regarding companies with which they are involved, and demonstrate how powerful the activist investor model can be in generating returns for shareholders. Frost tends to have a knack for building smaller companies while remaining relatively quiet until there is enough substance in place to start spreading the word and leveraging his resources. Icahn is generally less involved from the ground up, but is more apt to spot opportunities in larger companies trading at discounts for reasons he believes he can fix by getting involved as an active investor. This is why I find Cadus so intriguing, as it is almost like Icahn playing Frost's game.
Earlier this week it was announced that Icahn got his way with his activist stake in Transocean (RIG), as Transocean declared it will dividend out $1.1 billion in cash to shareholders. This was something for which Icahn had been publicly pushing hard for. As has been demonstrated many times over, he tends to get his way when he has a large stake in a company and that way typically ends up being profitable for fellow shareholders. Transocean is up 15% in the past week alone.
This is a primary reason I have accumulated a position in Cadus Corporation , a company in which Carl Icahn owns more than 40% and his son Brett Icahn is on the Board of Directors. To top off the heavy position in the company by the two Icahns, Cadus' cash liquidation value is greater than its current share price. With the Transocean deal in the rear-view mirror, I believe Icahn Sr. is more apt to focus some attention on using some of Cadus' cash stockpile to build something significant for a company in which he both has a significant stake and to which his son's name is attached as a Director.
Name and Address of Beneficial Owner (1)
Number of Shares Amount and Nature of Beneficial Ownership
Percentage of Common Stock Owned(2)
Carl C. Icahn
767 Fifth Avenue
New York, New York 10153
5,260,838
(3)
40.03
%
Don C. Whitaker
3 Palmbrook Lane
Henderson, NV 89052
1,195,000
(4)
9.09
%
Ancora Advisors, LLC
One Chagrin Highlands
2000 Auburn Drive, Suite 300 Cleveland, Ohio 44122
670,203
(5)
5.10
%
James R. Broach
--
*
Brett Icahn
--
*
Peter S. Liebert, M.D.
8,834
*
Jack G. Wasserman
--
*
David Blitz
c/o Joel Popkin & Company, P.C.
1430 Broadway (Suite 1805)
New York, NY 10018
--
*
All executive officers and directors as a group (5 persons)
8,834
0.06
%
Closer Look at Icahn's Activist Model
Icahn Enterprises reported revenues of $5.7 billion for the three months ended September 30, 2013 and net income attributable to Icahn Enterprises of $472 million. That's up from $4.5 billion of revenues and a net income of $84 million for the same quarter in 2012. In addition to announcing these impressive numbers, Icahn attached a passage showing his commitment to and belief in the activist model:
I believe that by far the best method to utilize in investing is the "Activist" model. I have spent a great deal of time and effort perfecting its use and I am happy to say that IEP has been a beneficiary of this. An investment in IEP stock made at the beginning of 2000 has increased by approximately 1,500%, or an average annual return of 22%, through October 31, 2013. But perhaps more compelling is that since April 1, 2009, when the economic recovery started: 1) an investment in IEP stock resulted in a total return of 347%, or an average annual return of 39%, through October 31, 2013, and 2) IEP's indicative net asset value has increased during this period by 282%, or an average annual return of 35%, through September 30, 2013. Most importantly to current IEP unit holders is that in my opinion there has never been a better time than today for activist investing, if practiced properly. Several factors are responsible for this: 1) extremely low interest rates, which make acquisitions much less costly and therefore much more attractive, and 2) the current awareness by many institutional investors that the prevalence of mediocre top management and non-caring boards at many of America's companies must be dealt with if we are ever going to end high unemployment and be able to compete in world markets. I believe that the greatly increasing need for a catalyst to make acquisitions possible and to make mediocre managements accountable will be of meaningful benefit to IEP in future years. As a corollary, I expect that low interest rates will greatly increase the ability of the companies IEP controls to make judicious, friendly or not so friendly, acquisitions.
Coming straight from Icahn himself, there has never been a better time for activist investing. Let's take a look at a few specific examples of this involving Icahn. Showing just how powerful his name alone has become, following a single tweet from Icahn, Apple's (AAPL) stock jumped $20. The characters "We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Time Cook today. More to Come." are worth a $17 billion increase in market cap over the following hour when tweeted from Icahn's twitter account.
Another highly visible recent example of Icahn's prowess was Icahn Enterprises' enormous score in Netflix (NFLX). Icahn Enterprises' cost basis in the company when it bought in just over a year ago was $58/share. It liquidated half of its position at the end of October between $301-$304 and still holds the other half, with Netflix closing yesterday at $333.73. This constitutes gains of over 400% and over $1.5 billion.
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Cadus Fundamentals and Shareholder Discontent
It goes to show that patience pays off when investing alongside Carl Icahn. A closer look at Cadus shows why I think patience will soon pay off for investors in this Icahn company in particular. As of September 30, 2003, Cadus had $22.1 million in cash and a total of $22.6 million in assets compared to <$10k in liabilities. With 13,144,040 fully diluted shares outstanding, this equates to $1.70/share in cash. The company burn is as minimal as it can get, while Icahn seemingly waits for the right acquisition candidate to merge in. Cadus' CEO is paid as a consultant, taking home $25k per year. Cadus' board, including Brett Icahn, is compensated $28k per year as a whole. The average monthly burn for the past 9 months was just $27,777. In addition to the cash, Cadus had tax net operating loss carry forwards of $18.9 million as of December 31, 2012. With the right acquisition, this could have the added benefit of a $0.58 increase in earnings per current share outstanding.
There is no question that Cadus has been biding its time with its cash moat waiting for the right acquisition opportunity. There is no question that any news of a possibility of the sort, especially coming from an Icahn, could cause a serious spike in the current share price.
So what is the question that needs to be answered is, when?
There have been a few shareholders that have publicly voiced their discontent with the way Cadus has stagnated with no forward visibility. Just a month ago, Farpoint Capital publicly filed this letter to Carl Icahn. Here are some comments from it:
Dear Mr. Icahn:
Your record as an investor is legendary. "Investor of the Century" would be an appropriate description of your accomplishments and prowess in corporate and financial matters. Shareholders of Icahn Enterprises have seen their shares rise from a low of $9.04 a share in 2003 to $83.80 a share as of the close on October 10, 2013.
Sadly, as long suffering shareholders of Cadus, our lack of investment return has been frustrating and disappointing.
This is not the kind of performance that investors have come to expect from Carl C. Icahn. Perhaps as a Twitter devotee you should share it with your followers. Where is your vaunted concern for shareholders?
Owning, as you do, 40% of the outstanding shares, attempting to replace the existing Board through the proxy process would be a quixotic and likely futile exercise. We do wish to call to your attention the voting results at the 2012 annual meeting of Cadus shareholders. The non-Icahn controlled votes were cast overwhelmingly against your nominees. As the self-proclaimed guardian of shareholder rights, are you listening?
Icahn has made a name for himself as an investor who can not only spot great value opportunities, but as someone who can then get actively involved and help cause that value gap to be realized for all shareholders upon acquiring a meaningful position. This is the reason stocks shoot up simply on the news that Icahn purchased stock. It is because investors know just from that piece of information that Icahn must have a plan in place that would create value for fellow shareholders.
I do not believe Icahn wants to tarnish this reputation by not taking some sort of action with Cadus in the near future, especially now that the company has already stagnated for a bit of time. Having his son Brett on the board of directors causes this to be even more true. This could be where Brett makes a name for himself as I am sure his father would give him and the reigns and his support in this regard. Following Carl and Brett's minor public quarrel, I imagine Brett wants to prove himself even more. Cadus presents the perfect opportunity for him to do just that.
Icahn Dabbling in Frost's Space
Back to the Icahn versus Frost theme, I stated earlier that Cadus reminded me of a more typical Frost investment. Frost has had several large successes this year that at the beginning of the year had seemingly minimal operations and that have since significantly increased in value as positive news flow has been released. There are two in particular that I would like to highlight:
Safestitch Medical: Up 627% this year. This is due in large part to the announcement of a merger with a private company named TransEnterix which has generated much shareholder excitement.
Tiger Media (IDI): Up 21% from the start of the year and up 69% off its lows this year. Vended out its prior operations and has a $45 million market cap.
I highlighted Safestitch because I believe a similar result is possible with Cadus should an announcement come from the Icahns regarding merging in a private company with large potential.
Tiger Media on the other hand, provides an interesting comparison to Cadus in its current state. Since Frost has a reputation for building these types of companies using different vehicles, he has developed quite a following in the small-cap space and his vehicles trade at valuations based on his involvement. Tiger Media has $2.6 million in cash, minimal operations, a high burn, and currently supports a $45 million valuation. This is twice the valuation of Cadus for a company with $20 million less in cash and that will probably need financing in the near future. This is because the majority of Icahn's followers are large-cap investors and have overlooked this small-cap of which he owns >40%. I think Icahn just addressing a plan for Cadus could have it trading at comparable valuation metrics as Tiger Media, which would be a 4x increase from its current share price.
Activist Shareholders Taking on the Preeminent Shareholder Activist?
There is an alternative scenario I see potentially playing out in Cadus that could also be exciting for shareholders. On September 26, 2013, private investor Don C. Whitaker filed that he had accumulated a 9.09% stake in Cadus while stating that his intention is "to try to be patient while the search continues to find a promising acquisition candidate realizing that while the search continues the expense of maintaining the company has been … $0.01 per share per quarter." Just yesterday a private investor, Barry Honig, filed a 13G showing he had accumulated 527,629 shares equating to 4% of the company. What a turn of events it would be if a group of shareholders realizing the untapped value here, including Farpoint, Whitaker and Honig, made an activist play against the prominent activist investor of our time? I think that would be a wake-up call that Icahn would seriously respect and that would cause him to get on the same page with instituting a plan to unlock tremendous value for shareholders in short order. Regardless, with the Transocean deal behind him and IEP recently shedding half of its Netflix position, I think Icahn, along with his son Brett, will be able to divert attention to Cadus which will be a catalyst in itself.
Conclusion
Carl Icahn and Phillip Frost have two of the best investing pedigrees one could find anywhere. I find it intriguing that Icahn appears poised to venture more into Frost's sweet spot with Cadus, while Frost is building a multi-billion medical holding company in Opko that could make even Icahn envious. I believe investing in Cadus right now is the most leveraged investment to be made alongside either one of them. It allows an investment in Icahn at cash value, something that is not possible in Icahn Enterprises or any of Frost's various investments. The biggest risk here is the timing of when an announcement could come from the company, as Icahn has already left it stagnant for some time. Considering the relative size of his position and the recent shareholder feedback, though, I believe there will be something soon on the horizon. In the meantime, investors are protected by the liquidation value of Cadus' cash position. I think this is an investment opportunity in Icahn that Frost would find worthy.
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