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Apple Preferred Stock Plan Would Help Value, Einhorn Says

February 22, 2013

Greenlight Founder David Einhorn

While Apple Inc. last year announced a dividend and stock buyback, Greenlight Capital Inc. founder David Einhorn says the company should issue preferred shares to provide more value to shareholders. Photographer: Scott Eells/Bloomberg

Greenlight Capital Inc. founder David Einhorn, reiterating his call for Apple Inc. (AAPL:US) to return more cash to shareholders, said issuing preferred stock would unlock about $150 a share in value.

“Apple’s attitude towards managing its cash has been exceedingly non-innovative,” Einhorn said on a conference call yesterday. Apple should use $47 billion to issue preferred stock with a quarterly dividend of 50 cents indefinitely, he said. Shareholders would see a benefit of $61 a share more under this plan than with other ways of returning cash, Einhorn said.

Einhorn has sued the company to block a proposal that would require Apple to seek shareholder approval before issuing preferred stock. His moves are the most aggressive yet in an effort by some shareholders (AAPL:US) to get the iPhone maker to give back more of its $137.1 billion in cash and investments. The company’s stock, which jumped more than ninefold from the end of 2005 to a record in September, has declined 36 percent since then amid rising concern that sales growth is slowing.

While Apple last year announced a dividend (AAPL:US) and stock buyback, Einhorn says the company should issue preferred shares to provide more value to shareholders. Greenlight holds more than 1.3 million Apple shares, or a stake of less than 1 percent, according to company filings.

‘Blank Check’

Apple in a December proxy statement included the proposal to do away with so-called blank check preferred-stock offerings, which can be issued without shareholder approval. The company has said the measure was crafted to improve governance. Apple, based in Cupertino, California, said it had no intention of issuing preferred shares and hasn’t activated any since 1997, the year the late Steve Jobs returned to lead the company he co- founded.

Einhorn, known for predicting the demise of Lehman Brothers Holdings Inc., is recommending that Apple issue preferred stock that would be traded alongside common shares and funded by operating cash flow. It would have a 4 percent annual cash dividend, paid quarterly, Einhorn said in a letter to shareholders.

The proposal isn’t resonating with some investors.

“Our concern is that Apple’s proposal is a very pro- shareholder resolution that is being hijacked,” said Rich Clayton, research director at CtW Investment Group, which advises pension funds that own 2 million Apple shares. Apple could still adopt Einhorn’s plan even if voters pass the proxy measure, known as Proposal 2, he said.

Questioning Einhorn

“It’s in no way, shape or form necessary to oppose shareholder Proposal 2 for it to happen,” Clayton said. “Greenlight’s tactics don’t make a lot of sense.”

Clayton has questions about whether Einhorn’s proposal would benefit shareholders. He said he’s concerned that the 4 percent dividend yield could fall if interest rates rise, and wonders whether Einhorn’s preferred shares would prove as attractive to fixed-income investors as Einhorn suggests.

“They’re being described as being similar to a long-term corporate bond, but there’s more risk,” Clayton said.

Earlier this week, the Nathan Cummings Foundation, which invests in Greenlight Capital through a pooled investment vehicle, wrote a letter to Einhorn saying the effort to block the proposal undermines shareholder rights.

‘Silly Sideshow’

Apple spokesman Steve Dowling declined to comment yesterday, referring to the company’s prior statements on Einhorn’s proposal. At a Goldman Sachs Group Inc. investor conference this month, Apple Chief Executive Officer Tim Cook called Einhorn’s lawsuit a “silly sideshow” and a “distraction.” While he said Apple will consider issuing preferred shares, he said the company would ask for shareholder approval no matter what.

“This seems bizarre to me that we’re being sued over something that’s good for shareholders,” Cook said at the Goldman Sachs conference.

Einhorn said he’s not opposed to eventually putting the preferred stock issue to a shareholder vote if Apple wants.

Issuing preferred shares is “innovative” and there aren’t other examples of companies making such a move to predict how Apple’s new shares would trade, Einhorn said yesterday. He said the new stock -- which he is calling “iPref” -- may start off trading more cheaply than existing shares, though it would probably gain in value as investors get a better understanding of the new structure.

Advisory Groups

Apple’s proposal has won the backing of groups such as shareholder advisory firm Glass Lewis & Co. and Institutional Shareholder Services Inc., while Egan-Jones Proxy Services recommended voting against the measure.

Investors will vote on the proposal at Apple’s annual shareholder meeting, scheduled for Feb. 27. Einhorn said holders should use the vote to urge the company to return more cash.

“Send them a clear message about what to do,” he said on the call.

The company and Greenlight presented their cases in court this week, and a federal judge in New York said he would rule on Greenlight’s request before the shareholder vote.

Apple rose less than 1 percent to $448.86 at 9:41 a.m. in New York. Through yesterday, the stock had lost 16 percent this year, compared with a 5.3 percent gain for the Standard & Poor’s 500 Index.

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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