“Investor Carl Icahn proposed that Apple collects $150 billion in debt to repurchase its own shares through a $525 a share tender offer. Icahn keeps on pushing Apple to return more cash to the shareholders. I agree with Icahn and Apple should collect debt as soon as possible,” Pim Keulen writes for Seeking Alpha. “However, I do not agree with Icahn’s plan to repurchase shares through a $525 a share tender offer. This article provides an insight in the potential way to return cash to the shareholders and the effects of the repurchases on Apple’s earnings per share.”
“Much has been said about the company’s cash pile of $147 billion. This giant mountain of cash provides no additional value for Apple’s shareholders. Further, most of the cash is held by overseas subsidiaries. The subsidiaries are not (yet) subject to U.S. corporate tax. Therefore, Apple wants to keep the cash in the overseas subsidiaries for a while,” Keulen writes. “To return additional cash to the shareholders, Apple needs to add debt to their balance sheet. On September 28, 2013 the company has only $40 billion in long-term debt on its $207 billion balance sheet. The interest rate is currently very low. Apple paid only an average of 1.85% interest regarding the $17 billion in debt collected this year. This favors Apple to collect more debt and increase the leverage of its balance sheet. Apple will also benefit from low interest costs. The company could return the cash collected by the issuance of new debt directly to the shareholders, because the company already has $147 billion in cash.”
“I suggest that Apple collects $75 billion in debt (half the amount Carl Icahn suggested) and return the $75 billion to the shareholders immediately through the combination of a capital repayment and a reverse stock split. This increases the leverage and still keeps Apple’s balance sheet solvent (around 25%). The capital repayment supports Apple’s earnings per share immediately. The total number of outstanding shares decreases from 899 million to 754 million (83.9% of the current outstanding number of shares). For example: a shareholder owns 100 Apple shares. Apple returns 83 shares to the shareholder after the reverse stock split (5 for 6 consolidation) and additionally returns $8.806 (17 times $518) in cash,” Keulen writes. “I compared the reported earnings per share in the fiscal year 2013 with my calculated earnings per share after the $75 billion capital repayment. I find earnings per share can be 13.8% higher when Apple returns $75 billion through a combination of a capital repayment and a reverse stock split.”
Much more in the full article here.
[Thanks to MacDailyNews Reader “Carl H.” for the heads up.]