Einhorn Proposes "iPrefs" to Solve Apple's Cash Problem

Hedge fund activist David Einhorn hosted a public conference call today about his position about Apple’s bloated balance sheet, calling it similar to an “inventory problem” and a “war vault.”

Greenlight Capital’s Einhorn suggested a number of ways Apple could distribute some of its $137 billion cash to reward shareholders including a one time dividend, a share repurchase, or doubling the dividend.  However, Einhorn believed the best way to give back to shareholders was through a perpetual preferred stock he termed “iPrefs.”

He said because the iPrefs would be perpetual preferred stock, they would pay quarterly dividends forever and have no maturity.   He also said that Apple can distribute iPrefs tax-free and at no cost to existing Apple shareholders.  Apple would have the right to redeem them at face value, but Einhorn said they don’t expect them to do so.

Under Einhorn’s iPref scenario, for every share of common stock owned, Apple would award one $50 iPref with a $2 annual dividend.  He said that one iPref for each of the 945 million shares of common stock outstanding totals $47 billion of iPrefs.

Einhorn said that distributing a total of five iPrefs per common share would be the equivalent of almost doubling the dividend and unlocking $150 per share, versus unlocking only $65 per share by raising the common dividend by $9.5 billion.

He also said that Apple’s CFO dismissed Greenlight Capital’s iPref proposal previously but said CEO Time Cook is now considering it.  “In the last week, Mr. Cook has called the idea creative and said that Apple would study the proposal carefully–we look forward to meeting with Mr. Cook and his team.”

Earlier in February, Greenlight filed suit in federal court in New York to force Apple to modify a proposal in its proxy, which Greenlight believes does not conform to regulatory rules.  Specifically, Greenlight asked fellow holders to vote against proposal number two, which would allow Apple to eliminate preferred stock.

In the conference call today, Einhorn insisted that because Apple is now considering the iPref proposal, there is no need for proposal two.  He again encouraged investors to vote against the proposal in order to send a clear message to the board that investors are dissatisfied with Apple’s capital allocation policy.