Bill Ackman is really liking his chances of turning a profit with his short of Herbalife Ltd. (NYSE:HLF). Speaking on CNBC, he noted that last year wasn’t a good year to be short Herbalife. However, he says the tides are turning now.
Herbalife under investigation
He notes that the Federal Trade Commission has now launched an official investigation. He added that the agency had 15 months to conduct a preliminary investigation and that deciding to formally investigate requires a vote by a majority of the commissioners.
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There have also been media reports about other ongoing investigation, including two possible criminal probes reportedly being run by the Department of Justice and the FBI. Also the attorneys general in New York and Illinois have launched their own investigations, as has the Canadian Competition Bureau.
Herbalife distributors are “very vulnerable”
Bill Ackman believes Herbalife Ltd. (NYSE:HLF)’s top distributors are especially vulnerable in these investigations, calling them the “weaker links in the chain.” He noted that when officials target a hedge fund, they usually go after the analysts before targeting the CEO. He also thinks that Herbalife is fully aware of what its distributors are doing, noting that the company spent $4 million on a “boondoggle in Europe” for its top 50 distributors.
When asked how Herbalife Ltd. (NYSE:HLF) could remain viable for 30 years if it truly is a pyramid scheme, Ackman noted that the company nearly disappeared in 2000 when its founder died. He questions why the company almost went out of business because it’s a weight loss company. However, he said it is possible for companies to last. The activist investor said Herbalife has a 90% quit rate and that it is possible to turn over 3 million distributors each year for quite some time without any scrutiny, although now the company is being scrutinized.
“It’s a certainty that Herbalife ‘is a pyramid scheme,” Ackman said. “The question is how quickly the government will act, what will they do, what will happen?”
Herbalife buys back stock
Ackman said as of right now, he’s still down on his bet against Herbalife Ltd. (NYSE:HLF). He shorted the stock at between $45 and $50 per share, and now the stock is around $64 a share. He said currently most of his position is in the form of puts, and nothing has changed in five or six months. However, he said is position is “notionally larger than it was before. He thinks the clock is now ticking on Herbalife. In fact, he thinks the timing of the company’s share buybacks is questionable.
“After these investigations were launched, Herbalife continued to buy back stock at the fastest pace I’ve seen at almost any public company,” Ackman told CNBC. “They’re buying back a billion, 600 million of stock… The stock went to 49 on the ftc investigation, they announce this huge buyback and they drive the stock up. Most companies try to buy back the stock at low prices here it looks like they’re trying to support.”
Herbalife Ltd. (NYSE:HLF)’s aggressive buyback program ends on June 30. Ackman says that the more shares the company buys back, the less money that will be available to victims. He believes it’s strange that Herbalife is buying back so much stock while it is under investigation.
Bill Ackman and Carl Icahn
Also speaking on CNBC, Ackman addressed Carl Icahn, who has opposed him on Herbalife Ltd. (NYSE:HLF) and gone long on the company. Ackman says that although he and Icahn spent a year or so hating each other, it’s time to move on. In fact, he said he would like to help Icahn get out of Herbalife Ltd. (NYSE:HLF) now while there’s still a chance for longs to make a profit.
“I like Carl, we could absolutely team up together,” Ackman said. “I’d love to find him a way out of Herbalife because I think if he could get out now, he’d have a very nice profit,”
He also said they have a common enemy, which is the movement to shut down investor activism. Martin Lipton, who has spearheaded the anti-activism movement, has spoken out against short term investing, lumping activist investing in with it. Ackman said while he agrees with Lipton that short term investing is bad, good shareholder activism is not short term in nature and thus, isn’t bad.