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Billionaire financier Carl Icahn has wrestled yet another corporate behemoth to the mat, wringing major concessions from senior managers at Transocean (NYSE: RIG), the oil rig giant with an $18.4 billion market cap. This is the second time we have reported on Transocean.
If you took my recommendation then, you probably built
a shrine to me in your home now that the "Icahn Lift" has
occurred. You're welcome.
Taking another corporate scalp is right out of the Icahn playbook. The Icahn formula is to target a specific company, and start acquiring enough shares to give him controlling interest in the firm, thus making him "first” among company shareholders.
With his new management and board team in place, and with increasingly enthusiastic shareholders and investors pushing the firm's stock price upward, Icahn pads his already deep pockets in the process (he's rumored to be worth $20 billion).
"They call him 'King Carl' for a reason—he's a legend,” notes Vijay Marolia, MBA, CFP and managing partner of Regal Point Capital in Orlando, Florida. Marolia, who has tracked Icahn's investments for years, says that the financier's investment style isn't exactly new—but it is effective.
"In essence, Icahn's a value investor, but he sees value where other value investors don't,” he explains. "He's known as a tough negotiator and you don't want to go against him. I actually have exited a short position solely because he was on the long side, and he has the money and power to do what he wants to do, including turning a losing company into a profitable one."
"His name is so powerful and respected on Wall Street that there's a name for what happens to a stock after he announces that he's buying: it's called the "Icahn Lift,” as the price tends to immediately go higher based just on his reputation and track record,” adds Marolia.
So is that the case with Transocean? I think so, and you can count on a nice bump-up in dividend payouts in the process, as well as a strong long-term portfolio play.
Icahn got four major concessions from the RIG deal that was announced on November 11:
- He reduced the size of the company board of directors, from 14 to 11, and added two Icahn Enterprises LP (NASDAQ: IEP) insiders, Samuel Merksamer and Vincent Intrieri, to the board.
- He convinced RIG management to hike the firm's shareholder dividend payout from its current level of $2.24 to $3.00 (although Icahn, holding 6 percent of company shares, wanted the dividend to rise to $4 per share). That dividend payout, representing a 34 percent hike to stockholders, was the first dividend hike since 2011, when the oil rig giant had to turn off the spigots on dividend payouts to pay for legal and regulatory damages stemming from the 2010 Gulf of Mexico oil spill.
- He jawboned Transocean executives into beefing up the firm's bottom line via a proposed $800 million cost-cutting and operation efficiency campaign (up from the $300 million management proposed).
- He convinced RIG officials to okay a new master limited partnership spinoff to launch in 2014, thus providing some built-in tax savings for the firm, and locking in even more cash for Icahn after the MLP's initial public offering rolls out next year. The deal fueled an immediate 4 percent run-up in RIG shares, and had some Wall Street energy analysts staking out some aggressive turf on Transocean. Guggenheim, for example, raised its outlook on RIG to $70 per-share, up from $56.
Data from inside the company released last week notes that of the 39 deepwater global offshore drilling rigs expected to be dormant in 2014, 14 of them belonged to Transocean. That's a disturbing number, given that most deepwater drilling contracts last five years, and it's a possible sign that oil and gas exploration companies will wait out Transocean in hopes of landing more favorable terms for those drilling leases.
That could happen, but would only be a temporary setback, according to the company. Transocean execs say that the firm will drill 1,250 deepwater wells over the next 12 years, compared with 550 such wells today. The company expects to invest about $1.5 billion to $2 billion in revamping its wells over the next five years, as the average age of a RIG-owned well is 14 years, compared to three years for chief competitors like SeaDrill (NYSE-SDRL).
That's the long-term view, and it's a necessary one to take for Transocean.
In the meantime, Icahn believes he has bought the company some much-needed time, and has made the company's stock story a more compelling one for investors.
"I am especially happy about the commitment to pursue an MLP, raise the dividend and increase margins by $800 million through cost cutting and increased efficiency,” Icahn said in a November 11 statement. "I believe that Transocean is now on the road to realize its great potential.
With Transocean returning to profitability in 2013 (it has posted three straight quarters of profits so far in 2013, with a net income of about $1.17 trillion during that period), Icahn may be on to something.
It wouldn't be the first time that's ever happened.