Herbalife Ltd. (NYSE:HLF) has issued more than $1 billion in convertible bonds to Bank of America Merrill Lynch, Credit Suisse Group AG (ADR) (NYSE:CS), HSBC Holdings plc (ADR) (NYSE:HSBC), Morgan Stanley (NYSE:MS), and possibly other institutional investors as part of the stock buyback plan that it upped from $1 billion to $1.5 billion a few weeks ago.
Herbalife issues $1.15 billion in convertible senior notes
According to a recent filing, Herbalife Ltd. (NYSE:HLF) issued $1 billion in convertible senior notes 2.00% due 2019 on February 7 and another $150 million worth on February 12. Herbalife had $653 million left over from its previous buyback plan, so even if it goes through with the full $1.5 billion in repurchasing it should still have some cash on hand from the deal.
Buybacks could put pressure on short sellers
Such a large buyback program could make life more difficult for short sellers, because it becomes easier for others to initiate a short squeeze, but it could also hurt the company’s financial standing and encourage more people to bet against them.
“The company is now a levered pyramid scheme,” said Bill Ackman, reports William Alden for The New York Times, “and we like that.” After losing something like $500 million last year, Ackman’s Pershing Square is now using put options to hedge against another short squeeze so he doesn’t think the buyback program will affect his position much, saying that “on the margin, it’s helpful to us.”
Ackman has argued that Herbalife Ltd. (NYSE:HLF) is an illegal pyramid scheme and thinks that the company should ultimately be worth nothing. There are currently a number of court cases against Herbalife from former distributors who make the same allegations, and Ackman is now funding a campaign meant to demonstrate that senior distributors engage in illegal activities. Herbalife has said that it’s considering a lawsuit against Ackman for tortuous interference, but with such a harsh, sustained attack Ackman must surely expect there to eventually be some blowback.
Herbalife Ltd. (NYSE:HLF)’s stock fell in January along with the rest of the market but it had a bounce at the end of the month. Unlike the market as a whole Herbalife is still trending down, though that’s probably not enough for Ackman to make his money back on the short position he took more than a year ago.