William Ackman Vows to Take Down Herbalife (HLF)
Nutritional and weight-loss supplements company Herbalife (HLF: Charts, News) suffered a major setback this week, after Pershing Square Capital CEO William Ackman called the company's multi-level marketing business model a "pyramid scheme" and stated that he was shorting the company for as long as possible.
Famed value investor and hedge fund manager William Tilson also joined Ackman in disclosing his short position on Herbalife and other multi-level marketing companies. Hedge fund managers David Einhorn and Jim Chanos, whose long and short positions are widely followed, are also rumored to hold large short positions against Herbalife. Daily Chart
On Thursday, Ackman, who launched a website attacking Herbalife, hosted a three-hour presentation to over 500 people, detailing evidence that the company was an "unsustainable pyramid scheme." Ackman, in a presentation consisting of over 300 slides, claimed that the company inflated the suggested retail price of its products and exaggerated its retail sales numbers in public filings. He also claimed that the company's multi-level marketing system - in which salespeople are tasked and rewarded for recruiting more distributors - took advantage of "poor and ill-informed" job seekers, forcing new recruits to take on even more distributors endlessly. Herbalife's salespeople not only make money on their own sales, but also on sales from new recruits whom they sponsor and bring into the company. Ackman called this business model a "modern day version of a Ponzi scheme." Ackman is the first major institutional investor to openly disclose a short position in Herbalife and to accuse the company of covering up problems in its business model. Shares of Herbalife, which had already been sliding for three months, plunged more than 25% after the announcements from Ackman, forcing Herbalife management to scramble to mount a defense against increased criticism. On Wednesday, Herbalife CEO Michael Johnson answered, claiming that Ackman's "bogus" accusations were manufactured to benefit his fund's "business model." Johnson also accused Ackman of stock manipulation, noting, "An extraordinary number of puts on our stock were due to expire this Friday. We previously learned this activity was pegged to some kind of significant event." Ackman said he was only shorting the stock directly with a heavy position accumulated over several months, and not engaged in any options trading whatsoever. Yet Johnson remained unconvinced, stating that Ackman made his presentation "on Thursday, the day before the puts expire." Johnson also complained that Herbalife executives were barred from Ackman's presentation and denied an opportunity to defend the company against the damaging accusations. "Had our executives been there, they would have been able to tear Mr. Ackman's premises and interpretation of our business model apart," Herbalife stated in an issued statement. Herbalife, which has a distribution network of 2.7 million salespeople worldwide in 81 countries, has hired law firm Boies, Schiller & Flexner LLP to defend against Ackman's attacks. Michael Johnson also intends to hold a special meeting on January 10 to counter the new allegations and address investor complaints. It also sped up its previously announced $1 billion stock buyback plan in an attempt to appease investors. B. Riley & Co. stock analyst Linda Weiser noted that the increased pressure on Herbalife had nothing to do with the company's fundamentals. She previously set a $101 price target on Herbalife before discontinuing coverage this week. "Herbalife's share price has been impacted significantly by market speculation related to high-profile short sellers," she stated. "We believe the business fundamentals and near-term financial performance of the company will not be the key drivers behind share-price performance for the foreseeable future." Herbalife is otherwise strong fundamentally, trading at 6.2 times forward earnings with a 5-year PEG ratio of 0.45. The stock also pays a quarterly dividend of 30 cents per share - a 4.26% yield at current prices. If Ackman and the other high-profile short sellers ease off, and Herbalife can mount a successful defense, then the company has a fighting chance to rally back towards its 52-week high of $73 per share. Other News About HLF Bill Ackman's Crusade to Crush Herbalife
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Published on Dec 28, 2012
By Leo Sun