Five years was long enough for Bill Ackman (Trades, Portfolio) to decide that Herbalife may not go to zero as he expected.
The head of hedge fund Pershing Square Capital Management told CNBC Wednesday afternoon that he unwound his entire bruising bet against the nutritional products company. In response, shares ticked up 7% to an all-time high.
Ackman opened his attack on Herbalife (HLF, Financial) with a 342-slide presentation he gave at the Sohn Conference in 2012. While the multi-level marketing company expected revenue to reach $10 billion by 2020, Ackman said it was a predatory pyramid scheme destined to fail.
“Participants in the Herbalife scheme, the distributors, ‘obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumer,’” a slide read.
“Herbalife inflates the suggested retail price (SRP) of its products and overstates ‘Retail Sales’ in its public filings to conceal the fact that Recruitment Rewards earned by distributors are substantially greater than the Retail Profit they generate.”
The Federal Trade Commission fined Herbalife $200 million after an investigation, but it never officially called the company a pyramid scheme. Herbalife hailed the ruling as a victory. The FTC did not force the company to change its core business model, but placed new restrictions on sales that affected only 20% of revenues, the company said.
“While it appears that Herbalife negotiated away the words ‘pyramid scheme’ from the settlement agreement, the FTC’s findings are clear,” Pershing Square said in a statement. “We expect that once Herbalife’s business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse as top distributors and others take their downlines elsewhere or otherwise quit the business.”
Ackman finally closed his short position in Herbalife in November, buying put options instead to cap further losses.
Over the past five years, the company has improved its financial picture in several areas. Revenue grew at a rate of 7.7%, Ebitda at a rate of 4% and free cash flow at a rate of 1.2%. It holds $1.28 billion in cash and $2.17 billion in debt on its balance sheet.Â
Net income, though, has fallen over the past five years, even as the company repurchased approximately a third of its shares since Ackman announced his short through the third quarter of 2017, Ackman pointed out in a third-quarter letter.Â
In the fourth quarter, Herbalife’s net sales increased 5% year-over-year to $1 billion. It was the first sales increase in two straight quarters, which were the first to implement the rules from the FTC's settlement. Net sales declined 3.3% in the third quarter and 5% in the second quarter.Â
Volume points declined 1.8% to 1.3 billion, meeting expectations. The company forecasted increased net sales growth for the full year 2018.
Another obstacle Ackman met during the Herbalife saga was prominent investor Carl Icahn (Trades, Portfolio), who took a long position on Herbalife of 22.88 million shares, or 26.2% of the company. In 2013, Icahn called CNBC during an interview with Ackman, calling him a “liar” with “one of the worst reputations on Wall Street.”
Icahn’s gain on Herbalife stood at an estimated 112%.
In addition to exiting Herbalife, Ackman has been amassing a stake in United Technologies, according to a report from CNBC (UTX, Financial).
