Business Context and Reporting Period
Company: American Real Estate Partners, L.P. (AREP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Overview: AREP is a diversified master limited partnership controlled by Carl C. Icahn (approx. 90% ownership). The company operates in three primary segments: Gaming, Real Estate, and Home Fashion. In late 2006, AREP divested its Oil and Gas operations and its Atlantic City gaming property (The Sands), reclassifying them as discontinued operations. The company also announced a proposed $5.2 billion acquisition of Lear Corporation in February 2007.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenues | $1,477.9 million | $901.0 million |
| Net Earnings | $798.8 million | $(25.7) million |
| Income from Continuing Operations | $23.1 million | $(22.7) million |
| Income from Discontinued Operations | $775.8 million | $(3.0) million |
| EBITDA | $1,138.8 million | $254.1 million |
| Cash and Cash Equivalents | $1,912.2 million | $460.1 million |
| Total Assets | $4,244.7 million | $3,963.5 million |
| Total Long-Term Debt | $1,209.0 million | $1,435.8 million |
| Partners' Equity | $2,310.7 million | $1,495.5 million |
Material Changes vs. Prior Period
- Discontinued Operations: The sale of Oil and Gas operations and Atlantic City gaming properties in Q4 2006 generated a gain of approximately $663.7 million, driving the massive increase in Net Earnings and Income from Discontinued Operations compared to 2005.
- Liquidity: Cash and cash equivalents increased by $1.45 billion (211%) to $1.91 billion, primarily due to proceeds from the divestitures mentioned above.
- Home Fashion Segment: The WestPoint International (WPI) segment reported an operating loss of $150.6 million in 2006, compared to $22.4 million in 2005. This was driven by restructuring charges ($45.6 million) and impairment charges related to plant closures.
- Real Estate Segment: Operating income increased by $10.2 million to $28.0 million, driven by increased sales at the New Seabury development in Massachusetts.
- Investment Gains: Net realized and unrealized gains on investments were $91.3 million in 2006, compared to net losses of $21.3 million in 2005.
Guidance, Outlook, and Risks
- Lear Corporation Acquisition: AREP entered into an agreement to acquire Lear Corporation for approximately $5.2 billion. The deal is subject to stockholder approval, antitrust clearance, and financing conditions. AREP intends to fund $1.4 billion from cash and secure $3.6 billion in new debt facilities.
- Home Fashion Restructuring: Management expects WPI to continue operating at a loss in 2007 due to ongoing restructuring efforts, including plant closures and offshore sourcing transitions. Additional restructuring charges of $25.0 million to $30.0 million are expected in 2007.
- Real Estate Outlook: Due to a slowdown in the residential/vacation home market, property development sales and profits are expected to decline in 2007 from 2006 levels.
- Legal Contingencies (WPI): Litigation regarding the bankruptcy acquisition of WestPoint Stevens challenges AREP's ownership of WPI common stock. If AREP loses control (ownership drops below 50%), it may be required to deconsolidate WPI, which would materially alter financial statements.
- Legal Contingencies (Lear): AREP is named as a defendant in shareholder lawsuits challenging the Lear merger, alleging breaches of fiduciary duty.
- Pension Liabilities: As part of a controlled group with Icahn affiliates, AREP is jointly liable for unfunded pension liabilities of other group members (e.g., ACF Industries), estimated at $87.2 million if plans were terminated.
Investor Verification Checklist
- WPI Ownership Status: Verify the outcome of the Delaware and Bankruptcy Court proceedings regarding WestPoint International. Determine if AREP retains >50% control and if consolidation of WPI remains appropriate.
- Lear Acquisition Financing: Confirm the closing of the $3.6 billion credit facility and the final terms of the Lear merger, including any changes to the purchase price or debt assumption.
- WPI Restructuring Costs: Monitor actual restructuring and impairment charges in 2007 against the $25M-$30M guidance to assess the timeline for profitability.
- Debt Covenants: Review compliance with debt covenants, particularly the "cash flow to fixed charges" and "unencumbered assets" ratios, especially in light of the potential Lear acquisition which may limit future borrowing capacity.
- Real Estate Sales Velocity: Track sales volume and pricing at New Seabury and Florida developments to confirm the anticipated slowdown in 2007.