In the five years since taking a short bet against Herbalife (HLF, Financial), Ackman’s losses have steadily piled up, with little relief. This week, they reached an apex not seen since 2013 as the company completed a generous share buyback.
Nutritional supplement company Herbalife reported on Oct. 6 the preliminary results of a plan to spend $600 million to repurchase roughly 7.2% of its total shares outstanding in a modified Dutch auction. Investors were willing to offer up only 6.7 million shares, worth $457.8 million, according to a statement. Final results, announced Oct. 11, confirmed the initial estimates.
The share price popped more than 11% for the Oct. 6. Based on the price the day he announced his $1 billion short in December 2012, Herbalife’s move balloons the price to around 70% higher than the price the day before Ackman announced his short position.
Ackman built his case against Herbalife with a campaign to prove his belief that it harmed employees who signed up to sell its nutritional products. As recently as last week at an investment conference in Dallas Ackman reiterated, “Certainly it’s a pyramid scheme.” Herbalife fought back, with the help of Carl Icahn (Trades, Portfolio), who has an opposing long bet on the company.
The tender offer enlarged Icahn’s ownership in the company to 26.22% from 24.57%, forcing him to submit a new filing with the SEC. Icahn is limited to owning half of the company.
Herbalife shareholders who sold back shares to the company will receive $68 per share and additional cash if it goes private within two years. The company announced the offer on Aug. 21, spurring a price increase from around $62 the previous trading day.
Also in the announcement, Herbalife said it held talks to go private with a potential buyer but ended the talks on Aug. 16.
“… Because these discussions contemplated the possibility of the company being taken private, the board of directors decided to provide tendering shareholders with some protection in the event the company is taken private within two years resulting in remaining shareholders possibly receiving a higher price than paid in the self-tender,” the company said.
Herbalife experienced eight solid years of revenue growth before 2015, when it was undergoing a Federal Trade Commission probe which it settled in 2016. Revenue grew to $4.49 billion in 2016 from $4.47 in 2015. The company also produced profits annually since 2005, reaching $260 million in 2016, a decline from $339 million in 2015. Moreover, its balance sheet reflects a decline of positive free cash flow, falling to $224 million in 2016 from $550 million the prior year. As of June 30, Herbalife had $1.62 billion in cash, next to $2.12 billion in long-term debt.
Gross margins at Herbalife have increased for three consecutive years, to 80.96% in 2016 from 80.85% in 2015. Operating margins narrowed to 10.2% in 2016 from 13.06% in 2015, their lowest since 2003.
Herbalife has a P/E ratio of 16.27, P/S ratio of 1.47 and P/B ratio of 34.84.
