BIILLIONAIRE CARL ICARN CON . tinues to deliver for sharehold ers of American Real Estate Partners, a low-profile, mini conglomerate controlled and managed by the master investor.
Icahn's forte is buying undervalued assets, often in bankruptcy, and then selling them when business conditions improve.
A month ago, he pulled off a coup by agreeing to sell the energy assets of American Real Estate Pcutners (ticker: ACP) for $1.5 billion, an impressive multiple of what Icahn paid to assemble those properties a few years ago.
The well-timed energy deal-coming before the recent dmvndraft in oil prices - has helped lift the company's thinly traded shares to a record 60 on Friday from 48 when the energy deal was announced. Icahn controls 90% of the 62 million outstanding shares.
BaTTon's has written favorably sev eral times on American Real Estate Part ners in the past decade and our last cu'ti cle ("Icahn's Alternative Asset," Feb. 6, 2006) ran when the stock traded at 34.
In that story, we argued that the company's assets - energy, casinos, real estate and textiles-were worth about $46 a share. That estimate has proven conservative, partly because we valued the energy assets at $300 million less than what the company received.
However, American Real Estate Partners shares are a bargain no longer. Our analysis of the firm's bal ance sheet and remaining assets sug gests the company is worth about $3.4 billion, or $55 a share.
The sale of the energy business roughly coincided with the disposal of Icahn's Atlantic City casino assets, nota bly the Sands, for $250 million. The two deals could leave American Real Estate Partners with about $1.4 billion of net cash and secm"ities (after subtracting debt).
The remaining casino properties, in cluding the Stratosphere in Las Vegas, may be worth $1 billion, or about 10 times annual cash flow. American Real Estate Partners also owns real estate, including a valuable development in Cape Cod, Mass., that could be worth $500 million.
Pricey Property
Our analysis suggest American Real Estate Patners is worth about $55 a share a discount to its current price near $60.
Asset Value(bil)
Casinos $1.0
Textiles 0.5
Real Estate 0.5
Net Cash 1.4
Total Value 3.4
Value Per Share 55.0
Amer Real Estate Ptnrs (ACP - NYSE) Monthly close on Oct. 5
It also has a majority interest in WestPoint Stevens, the textile company that emerged from bankruptcy last year. American Real Estate Partners' paid about $500 million for that stake.
As a limited partnership, American Real Estate Partners pays less in taxes than a corporation, which is a benefit for investors. Investors do pay taxes annu ally on the partnership's income.
The tax bill this year is likely to be heavy because American Real Estate Partners earned nearly $2 a share in the first half of 2006 and probably realized big gains on the energy sale. The com pany pays a nominal dividend of 40 cents annually.
One of the benefits of investing with the 70-year-old Icahn in this vehicle rather than through his hedge fund, Icahn Partners, is lower costs. The boss takes no salary or management fee. This contrasts ,yith Icahn's hedge fund, which charges a 2% base fee and 25% of the profits to its well-heeled investors. The hedge fund is said to have posted a solid 15% gain so far this year; the partnership, however, has risen nearly 60%.
The hedge fund showcases the activ ist Icahn, who has tangled with manage ments at Time Warner (TWX) and most recently, Imclone Systems (IMCL). He's been in the news mostly recently for seeking regulatory approval to build a bigger position in Federated Depart ment Stores (FD). American Real Es tate Partners owns shares of both Time Warner and Imclone.
American Real Estate Partners' main focus is to "acquire undervalued compa nies in distressed or out-of-favor indus tries." There has been periodic specula tion that Icahn, whose wealth recently was estimated at $9.7 billion by Forbes magazine, will buy out minoruty holders.
Icahn, however, has had ample opportunity to do so at lower proces and has passed up the chance. This suggest he likes having a public company that offers the significant tax benefits.
Investors have done well to ride with Icahn. The stock is up five-fold in the past three years. American Real estate Partners may reap additional profits as Icahn capitalizes on new opportunities, but the shares aren't cheap anymore.
