Analysis-Icahn's mark-up of meat packager extraordinary but possible, experts say

By Koh Gui Qing

NEW YORK (Reuters) - As investors and financial experts pored over Hindenburg Research's allegations against activist investor Carl Icahn's holding company this week, one easy-to-verify claim stood out in the short seller's report.

Hindenburg said Icahn Enterprises LP (IEP) valued a meat packing company in which it owns a 90% stake three times over its market value.

An IEP regulatory filing from March shows that it indeed valued Viskase Co Inc as a subsidiary at $243 million as of the end of December, when the market capitalization of the company was just $88.7 million.

IEP cited "the lack of material trading volume" in Viskase's stock as grounds for the valuation mark-up in the filing. Viskase's shares are traded in the over-the-counter market rather than a major exchange such as Nasdaq or the New York Stock Exchange.

Four corporate finance experts and two former U.S. Securities and Exchange Commission (SEC) officials interviewed by Reuters said IEP's valuation mark-up of Viskase was extraordinary, yet market rules allowed for it as long Icahn's firm disclosed it and could justify it.

"I have never heard of a 200% premium," said Anant Sundaram, a business administration professor at Tuck School of Business at Dartmouth College. "If there was an illiquidity premium, it has to be disclosed and it has to be founded in empirical evidence."

Icahn, who earlier this week called Hindenburg's report "self-serving" and said IEP stands by its disclosures, did not respond to a request for comment.

Viskase, Hindenburg and the SEC, which is responsible for policing the disclosures of U.S. companies, also did not respond to requests for comment.

IEP's shares have lost 40% of their value -- some $7 billion -- since Hindenburg published its report on March 2. One of Hindenburg's main claims is that IEP's payouts to shareholders are unsustainable. It said that Icahn's practice of getting paid dividends from his 85% stake in IEP in stock and IEP itself selling stock to raise cash constituted a "Ponzi-like" structure that artificially inflated the company's dividend yield.

IEP responded by pointing to $2 billion in cash on its balance sheet as evidence of its financial strength and said its performance will speak for itself over the long term "as it always has". On Thursday, IEP said after the stock market closed that it would preserve its dividend at $2 per unit for the first quarter. IEP's stock rose 10% in afterhours trading on the announcement.

HIGHER VALUATION MULTIPLE

IEP is scheduled to report its first-quarter earnings on May 10. Joseph Peiffer, a securities lawyer in New Orleans with Peiffer Wolf Carr Kane Conway & Wise, said IEP should be ready to show its valuation of Viskase was carried out "on a good faith basis".

"It's supposed to be mark-to-market, not mark-to-fantasy," Peiffer said. "You want to understand why something is marked the way it is."

IEP said in its filing it valued Viskase at nine times its adjusted 12-month earnings before interest, taxes, depreciation and amortization (EBITDA). Based on its stock price, Viskase is valued at only 5.4 times its adjusted 12-month EBITDA, according to Refinitiv Eikon. Its peer group's average is 7.6 times.

IEP did not provide an explanation for its use of the nine- times multiple.

Viskase, which is based in Lombard, Illinois and accounts for only a small slice of IEP's value, makes food packaging such as casings for sausages.

Krishna Palepu, a professor at Harvard Business School, said while it was possible to ascribe premiums to activist investors' holdings of companies on the basis that their control adds value, such mark-ups typically ranged between 20% and 30%.

"I have not run into 200% premium before," he said.

(Reporting by Koh Gui Qing in New York; Additional reporting by Chris Prentice in Washington, D.C.; Editing by Greg Roumeliotis and Sam Holmes)