Carl Icahn

Carl Icahn had a busy day on Friday. First, he called into CNBC for a 30 minute ‘discussion’ with Bill Ackman, which may better be described as a playground fight. The fight between Icahn and Ackman will likely go down as one the most exciting segments in financial TV history. However, Icahn was also doing some more important things with his time that day.

Carl Icahn revealed in a 13D filing after the close on Friday that his “Reporting Persons” group interest in Transocean has effectively climbed to 5.61% (a $525 million investment), more than double the initial amounts revealed last week in Swiss filings, making him the largest shareholder. Icahn is currently the largest shareholder. Icahn does not appear to be taking a strong activist stance (yet). Not surprisingly, Mr. Icahn’s group views Transocean LTD (NYSE:RIG)’s shares as undervalued and is asking RIG’s management and Board to instate a $4/sh dividend.

It intends to pursue this initiative with management and if these discussions fail Carl Icahn will propose the dividend at the annual meeting as is permitted under Swiss law and the company’s Articles of Association. In addition,  Icahnintends to engage management on strategic direction and the possible addition of shareholder selected nominees to the Board of Directors. According to the filing, Icahn purchased shares of Transocean LTD (NYSE:RIG) between January 4th and the 22nd.

It is not surprising that return of capital is the driving force in Carl Icahn’s initiative. Cash return is at the forefront of investor’s minds in the offshore drilling area given a very strong fundamental backdrop, record high revenue backlogs, rising cash flow, and what some see as overly aggressive capital spending initiatives.

Analysts at BMO believe that if Transocean LTD (NYSE:RIG) fails to accommodate the request, this initiative will garner significant support of its shareholders when put to a vote this spring. The analysts also believe that Transocean can afford to pay this dividend even though it may not be in keeping with the strategic direction management/BoD had in mind (i.e., acquisitions and new builds). The dividend approach does not hamper its ability to conduct its business and may ultimately result in better near-term value creation.

A $4 per share dividend represents a 7% dividend yield based on Friday’s closing price of $56.76.  More shareholder activism in the oil services sector is not new. Just this week Pamplona Capital Management switched its 13G filing in Nabors Industries Ltd. (NYSE:NBR)  to a 13D filing (~10% interest) and intends to engage management in areas to improve NBR’s external valuation.

Disclosure: No position

H/T Debbie Cai of WSJ