Activist investor, Carl Icahn released a new letter to his fellow shareholders in Transocean LTD (NYSE:RIG) encouraging them to vote for his proposal to increase the dividend of the company to $4 per share.
Icahn and his affiliates own approximately a 5.43 percent stake in Transocean LTD (NYSE:RIG). Last month, the company reinstated its dividend and recommended a payment of $2.24 per share annual dividend in response to the demand of the activist investor.
They explained that the dividend supports its key objective to accelerate the repayment of its debt and it established a basis for future increases depending on the situation of its business.
In his letter, Cal Icahn reiterated his demand for the increase of the dividend to $4 per share. He also asked the company’s shareholders to vote for the removal of Transocean chairman Michael Talbert, and directors, Thomas Cason and Robert Sprague.
According to him, these directors were responsible in destroying the shareholders value by $11 billion. He also noted that the directors continue to push for strategies that could destroy an additional $3 billion in shareholders’ value.
According to Icahn, the board of directors of Transocean LTD (NYSE:RIG) were responsible in destroying more than $10.3 billion of value through Global Santa Fe (GSF) merger and $1 billion of value in the Aker acquisition. He said, current capital allocation strategy of the company will likely destroy addition $3 billion.
He explained that the Global Santa Fe merger resulted in an increased in the age and volatility of the asset base of the company substantially while simultaneously increasing financial leverage. He emphasized that Transocean LTD (NYSE:RIG) paid $18.2 billion for the assets of GSF, which he estimated should only worth around $7.5 billion.
With the Aker Drilling acquisition, Carl Icahn noted that Transocean purchased assets at a premium to the net asset value, and paid it by issuing shares below the net asset value, thus, destroying approximately $840 million per share in value.
In his note, Carl Icahn wrote, “These board members are now up for reelection and shareholders have the opportunity, in our opinion, to close the valuation gap at Transocean by replacing the directors that oversaw the performance at Transocean, and by increasing the dividend to $4.00 per share. We believe that a $4.00 per share dividend will not only result in an appropriate and meaningful return of value to shareholders, but will also force discipline on the board.”
He emphasized that the existing capital allocation of Transocean LTD (NYSE:RIG) will result in the continued underperformance of the company compared with its peers in the industry.
“Transocean’s plan appears to use $8.75 billion of capital over the next several years to build new assets and reduce debt, generating an average after tax return of approximately 7%. The sheer size of this investment is equal to almost $25 per share. In fact, a $5 billion ($13.92 per share) investment in debt reduction would result in less than $200 million per year in after tax income ($0.57 per share). Based on an 8.25x 2015 P/E multiple, $8.75 billion of capital invested in this manner would only add $5.1 billion of value, thereby destroying another $3.6 billion of shareholder value,” Carl Icahn said.