Carl Icahn’s big problem

One giant chipmaker’s earnings to start: Intel announced a massive $18.7bn set of restructuring and asset impairment charges on Thursday in an attempt to clear the decks and accelerate its effort to rebuild its competitiveness.

Some new block trade rules to start: Hong Kong authorities are cracking down on how banks discuss block trades with hedge funds, after a criminal case against Segantii Capital Management and its founder Simon Sadler threw a spotlight on the practice.

In today’s newsletter:

• Carl Icahn’s latest financial worry

• Executives bemoan new UK taxes

• VW tries to steer out of latest crisis

Carl Icahn: PIK your poison

Is the plight of Carl Icahn’s corporate empire a canary in the coal mine?

That’s DD’s question after taking a fresh look at the crisis enveloping Icahn’s obscure, thinly traded holding company, Icahn Enterprises, from which he has launched fusillades against corporate giants like Apple, eBay and Dell.

Icahn is facing the pressure of a group of lenders breathing down his neck over a $2.7bn margin loan he owes. Meanwhile, his investment portfolio of a handful of niche public companies and large hedges against the market continue to get pummelled.

The latest drubbing came just this week when Icahn’s biggest holding, a small refiner called CVR Energy, which is also one of his principal cash cows, suspended its dividend.

Much of Icahn’s travails can be traced to the use of a financial manoeuvre that many sceptics compare to a flesh-eating bacteria.

Icahn Enterprises has paid one of Wall Street’s juiciest dividends for the past decade, but Icahn, who owns an 86 per cent stake, has generally decided to not take it in cash, and instead receive payments in kind — or PIK — via additional shares.

Doing so, however, has quickly eroded the value of Icahn Enterprises. IEP’s share count has quadrupled since 2013, mostly due to the shares Icahn received in lieu of cash dividends.

As a consequence, the value of Icahn’s shares has plunged. IEP’s net asset value per share has fallen from more than $50 in 2013 to about $9.

That has dramatically hit Icahn’s net worth. His 406mn IEP shares are worth just $3.6bn, but they are now all pledged to his bank lenders as collateral to the billions he owes. Net out Icahn’s declining assets against his debts, and it’s clear his net worth has tumbled during a giant bull market.

Forbes still values the activist as a multibillionaire with a net worth of more than $5bn. DD will take the under.

But relying on PIK has its consequences. Across Wall Street, buyout firms and their lenders are increasingly resorting to PIK loans to manage a cash crunch enveloping the $10tn private markets.

Private equity firms that overloaded a company with expensive debt can forgo making interest payments with cash and instead pay by adding to their loan balance.

Sceptics of their use note that eventually the bill comes due. And often the feature will eat into the value of a company — as it has with IEP.

Icahn’s woes have been a fascination of Wall Street since activist short seller Hindenburg Research outlined his dilemma in May 2023. Similar stories may be playing out with less fanfare across private markets.

‘It’s not exactly pro-business, is it?’

The reaction among some in the business community to the new Labour government’s first UK Budget was like that of a child who doesn’t start crying after a fall, until they clock the blood pouring out of their knee.

Yields on UK government bonds initially fell on Wednesday as chancellor Rachel Reeves delivered her speech in the House of Commons. But as the market digested the amount of extra borrowing she had announced, the declines reversed.

By Thursday afternoon, borrowing costs had reached their highest level of the year.

Similarly, PE executives initially expressed relief at Reeves’ plan to raise the tax rate on carried interest by 4 percentage points from April 2025 — until documents released after her speech revealed the full details of potential further reforms.

“They’ve slightly kicked the can down the road,” said one senior leader of a British firm.

A top partner at a large European firm was not just cautious about the carry reforms, but downbeat about the entire budget. “It’s not exactly pro-business, is it?” they told DD.

“Our portfolio companies are generally getting hit with higher national insurance contributions,” the buyout manager added.

“When you add it to the non-dom thing, which a lot of private equity people are affected by, the question is, is this going to start a structural shift in firms choosing London as their headquarters?”

For Sebastian Prichard Jones, a tax specialist at law firm Macfarlanes, the changes to business property relief “were unheralded” and will “inevitably lead entrepreneurs to question whether they wish to establish businesses in the UK”.

Another London tax lawyer said plans to bring pensions within inheritance tax stood out as “pretty unfair” in an overall budget that was, in short, “quite radical”.

Germany’s postwar poster child sputters

Volkswagen has been a hallmark of the German economy for nearly a century.

More recently, its huge investments in manufacturing electric vehicles have been critical in the country’s fight for industrial relevance globally.

On top of its economic importance, the carmaker is also a cultural icon, with dozens of brands including Porsche sport cars and Ducati motorbikes, to MAN and Scania trucks.

Yet this year, problems have compounded. Serious ones.

VW has lost ground competing with cheaper Chinese rivals such as BYD, and has had to reckon with a costly transition to EVs.

Yet the severity of its financial state became clear when the company in September said it was considering shutting down three factories in Germany — the first time it has done so in its 87-year history. The plan would also involve cutting tens of thousands of workers.

For employees and politicians, that crossed a line. Daniela Cavallo, head of VW’s powerful works council, has called her battle with management “existential” for the group’s 296,000 Germany-based workers.

Pushback has also come from Berlin. A government spokesperson said Chancellor Olaf Scholz’s position was clear that “possible wrong management decisions in the past must not be to the detriment of employees”, calling for the need to “maintain and secure jobs”.

The carmaker’s troubles deepened this week when it reported third-quarter results. It stressed the “urgent need” for more cost cuts after reporting a 64 per cent drop in quarterly net profit.

But even some financial analysts aren’t entirely convinced the slashes are necessary. A group of analysts at Bernstein, led by Stephen Reitman, weighed in after the earnings report.

While the results weren’t great, the analysts said the figures don’t “provide further ammunition to management’s argument that historic cost-cutting and sacrifices need to be made by the workforce in Germany.”

Job moves

• Société Générale chief executive Slawomir Krupa has replaced his top executives just over a year after he launched a reset strategy at the French bank. Deputy chief executive Philippe Aymerich, chief financial officer Claire Dumas, and the head of French retail banking Marie-Christine Ducholet are all stepping down.

• Mayer Brown has hired Sheel Patel as a partner and head of the firm’s private credit practice in New York. He joins from King & Spalding.

Smart reads

Miraculous turnaround It’s not every day that an executive stares down Apollo Global Management and lives to tell the tale, Lex writes. Carvana’s chief has — and had the company’s market value soar from $1bn to more than $50bn along the way.

Auto-fiction The man behind Elliott Management’s $2bn payday over Argentine debt wrote a novel that eerily mirrors reality, the Wall Street Journal writes. Prosecutors want to know how much of the story is true.

Barista-in-chief Starbucks’s new chief is bringing the coffee chain back to basics, the FT writes. Brian Niccol, who led a turnaround at Chipotle, is freezing prices, bringing back ceramic mugs and urging baristas to label cups by Sharpie pen.

News round-up

Rival creditor group offers Thames Water emergency loan at lower rate (FT)

Apple says iPhone sales are up but gives cautious holiday forecast (FT)

UK inheritance tax changes sound ‘death knell’ for family businesses, say owners (FT)

British aerospace pioneer Reaction Engines collapses into administration (FT)

Intel takes $18.7bn in restructuring and impairment charges (FT)

Elon Musk in funding talks with Middle East investors to value xAI at $45bn (FT)