Carl Icahn is a polite but impatient man. In a letter to Family Dollar (FDO) CEO Howard Levine that was released yesterday, Icahn thanked Levine for a nice dinner and cordial conversation the two apparently shared on Wednesday night. That formality having been taken care of Carl then spent just under 600 more words raking Levine and his company over the coals. Icahn bashed the Family Dollar for it's fundamental and share underperformance. He concluded by threatening to wage a costly proxy campaign to remove the entire board of Family Dollar unless the company immediately put itself up for sale using Icahn's hand-picked team as deal makers.
It's now been two weeks since Icahn's 9.4% stake in Family Dollar was made public and the stock is up about 17% in that time on nothing more than press releases and the reflected glow of Carl. While Mr. Icahn can point to those gains as evidence of his being a "man of the people," when it comes to shareholders the truth is a little stickier than that.
Icahn has voting rights for 10.7 million shares but that's misleading. Icahn actually only paid a total of $76.5 million for common stock and he hasn't purchased any actual shares since April 9th. Almost 90% of Carl's position is based on call options, most of which were purchased since the last week of May. That gives him enormous leverage. Icahn has made $15 million "alongside his fellow shareholders." As a little kicker Carl has generated another $122 million in profits from his call options. That puts Icahn's total gains at a very conservative $137 million; a nice little 50% gain for two months of transactions, a couple public filings and what sounds like a nice dinner with Family Dollar.
As for long-term interests, they're almost beside the point. The timing is ripe for a buyout but the back-up plan for retailers once they've been shopped doesn't exist. Fundamentally speaking the last thing on earth this chain needs is a distraction. Nelson Peltz first demanded Family Dollar put itself up for sale for between $40 and $60 a share way back in February of 2011. While Icahn is right in noting that Family Dollar has underperformed over the last three years, he fails to point out that the chain spent a decent portion of that time fending off a corporate raider and trying to find a buyer. The stock pop is nice, but what Carl is actually proposing is more of the same strategy that helped get Family Dollar in trouble in the first place.
Hats off to Icahn for a great trade and congrats to all Family Dollar shareholders. Just two warnings for individual investors: First, beware of billionaire activists who claim to be on your side. Your interests may be temporarily aligned but that's not quite the same thing as being long-term pals. Second, don't confuse what Icahn is proposing with a long-term strategic "plan." Putting a company up for sale is a Hail Mary strategy under the best conditions and you can bet Carl isn't going to let his $137 million in profits evaporate if the pass falls incomplete again.