Business

Whitney Tilson Celebrates Herbalife Ltd. (HLF) Decline

The following is from an email which Whitney Tilson sent to investors.

Whitney Tilson on 3G Capital eyes next targets; at Coke, newest flavor is austerity; 15 insane (but true) reasons the Herbalife fraud should be shut down today; activist shorts; what happened when Marissa Mayer tried to be Steve Jobs.

1) The annual Boys & Girls Harbor Investment conference is coming up on Thursday, Feb. 12th and the speaker lineup is the best ever:

William A. Ackman

Founder & CEO, Pershing Square Capital Management, L.P.

Ray Dalio

Founder, Chairman & Co-Chief Investment Officer, Bridgewater Associates

Stephen J. Errico

Managing Partner, Locust Wood Capital Advisers, LLC

Martin E. Franklin

Founder and Executive Chairman, Jarden Corporation

Joshua Kaufman

Managing Member, Brenner West Capital Partners

Larry Robbins

Founder, Portfolio Manager, CEO, Glenview Capital Management

Todd Sullivan

Founder and Managing Member, Rand Strategic Partners

Ronald A. Weibye

Managing Partner and Chief Investment Officer, Aperio Capital Management, LLC

To register, go to: https://www.theharbor.org/hic (it’s $1,500, $1,300 of which is tax deductible).

2) I’ve said it before and I’ll say it again: these Brazilian guys are the best operating managers in the world. Here’s a front-page story in today’s WSJ about them:

Whitney Tilson Celebrates Herbalife Ltd. (HLF) Decline

Brazilian investment firm 3G Capital Partners LP has used relentless ambition and big-name connections to become one of the world’s biggest acquirers of companies, including H.J. Heinz Co. and Tim Hortons Inc.

Now the firm is setting its sights on potential new targets that could give it control of even more of the world’s best-known consumer brands. In the past several weeks, investors have pledged about $5 billion to a new takeover fund being formed by 3G, according to people familiar with the matter.

3G hasn’t publicly disclosed the amount raised or what it plans to do with the money, but 3G usually seeks only what it needs in equity for individual deals, using borrowed money to at least quadruple the firm’s buying power.

In a sign of the investment firm’s aspirations, executives are discussing the possibility of trying to buy a food or beverage company such as Campbell Soup Co. , worth about $14 billion, or even PepsiCo Inc., which has a stock-market value of $140 billion, say people familiar with the situation.

People close to 3G, led by former professional tennis player Jorge Paulo Lemann, caution that no decisions have been made. 3G often studies targets for years before making a move.

And because a PepsiCo deal could be four times as large as Heinz and Tim Hortons combined, 3G might pursue only pieces of PepsiCo or try to join forces with Anheuser-Busch InBev NV, these people said. Mr. Lemann, his two partners and a group of Belgian families own a controlling stake in the beer maker. PepsiCo, Campbell and AB InBev declined to comment.

Some analysts have speculated that 3G also might be interested in Kellogg Co. and Kraft Foods Group Inc., each with more than $20 billion in stock-market value. Kraft’s board of directors replaced the packaged-food giant’s chief executive last month, signaling impatience with a turnaround there, while Kellogg cut the size of payouts to some executives if the cereal maker is sold.

3) Contrast these guys with Coke, which has said it will take FIVE YEARS to cut costs – the Brazilians would get the same amount done in ONE!

Coca-Cola Co. ads starring Santa Claus have been playing on TV, but the mood inside the world’s biggest beverage company is far from merry.

Atlanta-based Coke plans to ax at least 1,000 to 2,000 jobs globally in the coming weeks, the biggest thinning of its ranks in 15 years. It is also introducing stricter budgeting, telling executives to swap limousines for taxis, and dropped its lavish Christmas party for Wall Street analysts.

The moves are part of a $3 billion cost-cutting plan Coke announced in October after warning it would miss profit targets this year and next as consumers drink less soda, for decades its cash cow. The austerity push is a culture shock for a company that traditionally has grown, not shrunk, its way to prosperity.

Investors aren’t convinced Coke can pull it off and question if the cuts are sufficient. The company says the restructuring won’t be finished until 2019. Since Coke announced the plan Oct. 21, its share price has fallen 2.2%.

4) Quoth the Raven with a good summary of why regulators should shut down HLF immediately (this is one of my few remaining short positions). The stock has been in a freefall recently – QTR’s guess is that it’s because Bill Stiritz is blowing it out. I think he’s right.

Summary

  • These are 15 reasons that the Herbalife fraud should have already been stopped – if not shut down immediately, placed under injunction until FTC investigation concludes.
  • Herbalife insider caught on video calling the company “an eventual deception” and “inauthentic”.
  • First hand primary source evidence points to Herbalife being the largest fraud since Madoff/Enron.
  • Questionable death in Mexico surrounded by 7-8 year old questions about the lead content in Herbalife’s product.
  • Herbalife Board Member Pedro Cardoso is wanted for fraud in Brazil. Enough is enough – shut it down.

5) Speaking of activism on the short side, attached is the Year in Review by a new service I subscribe to called Activist Shorts which (surprise!) tracks all public/activist short campaigns. Here’s the summary:

Attached is our 2014 Annual Report. In it, you’ll find the winners of our end-of-the-year awards, our top 10 campaigns to watch for 2015, and direct quotes from activist short-sellers on the best shorts for 2015.

Our end-of-the-year awards are:

2014 Fraud Call of the Year: Gotham City Research targeting Let’s Gowex SA

2014 Valuation Call of the Year: Citron Research targeting Plug Power, Inc.

2014 Short-Seller of the Year: Gotham City Research

Our top 10 campaigns to watch for 2015 are topped by Globalstar (GSAT), Ametek (AME), and Nu Skin (NUS).

We also spoke with several major activist short-sellers on their favorite shorts and areas of focus. One of them told us, “We have identified an identity theft security company that we believe to be a worthless fraud.” Many found the biotech sector to be the most attractive sector to short. Quoted short-sellers include Manuel Asensio, Carson Block and Sahm Adrangi.

To learn more, please open the attached report.

It’s a very useful service – even if you don’t short, you’d better know what short sellers are saying about a company you own or are doing research on.

If you want to sign up for a free 30-day trial, just email the founder, Adam Kommel at akommel@activistshorts.com. And if you mention my name when you subscribe, we’ll both get an extra free month.

 

Investment Firm 3G Capital Eyes Next Targets

With New $5 Billion From Investors, Brazil’s Buyout Kings Start to Shop Around

Brazilian investment firm 3G Capital paid $3.3 billion for Burger King’s parent company in 2010, and that company acquired Tim Hortons for $12 billion in 2014. Investors who were part of the firm’s Burger King buyout have gained at least four times their original investment.

By Anupreeta Das, Luciana Magalhaes and Liz Hoffman

Jan. 6, 2015 10:37 p.m. ET

Brazilian investment firm 3G Capital Partners LP has used relentless ambition and big-name connections to become one of the world’s biggest acquirers of companies, including H.J. Heinz Co. and Tim Hortons Inc.

Now the firm is setting its sights on potential new targets that could give it control of even more of the world’s best-known consumer brands. In the past several weeks, investors have pledged about $5 billion to a new takeover fund being formed by 3G, according to people familiar with the matter.

3G hasn’t publicly disclosed the amount raised or what it plans to do with the money, but 3G usually seeks only what it needs in equity for individual deals, using borrowed money to at least quadruple the firm’s buying power.

In a sign of the investment firm’s aspirations, executives are discussing the possibility of trying to buy a food or beverage company such as Campbell Soup Co. , worth about $14 billion, or even PepsiCo Inc., which has a stock-market value of $140 billion, say people familiar with the situation.

People close to 3G, led by former professional tennis player Jorge Paulo Lemann, caution that no decisions have been made. 3G often studies targets for years before making a move.

 

——————-

At Coke, Newest Flavor Is Austerity

Belt-Tightening Might Not Be Enough to Offset Slowing Soda Sales

By Mike Esterl

WSJ, Dec. 23, 2014 11:32 a.m. ET

27 COMMENTS

Coca-Cola Co. ads starring Santa Claus have been playing on TV, but the mood inside the world’s biggest beverage company is far from merry.

Atlanta-based Coke plans to ax at least 1,000 to 2,000 jobs globally in the coming weeks, the biggest thinning of its ranks in 15 years. It is also introducing stricter budgeting, telling executives to swap limousines for taxis, and dropped its lavish Christmas party for Wall Street analysts.

The moves are part of a $3 billion cost-cutting plan Coke announced in October after warning it would miss profit targets this year and next as consumers drink less soda, for decades its cash cow. The austerity push is a culture shock for a company that traditionally has grown, not shrunk, its way to prosperity.

Investors aren’t convinced Coke can pull it off and question if the cuts are sufficient. The company says the restructuring won’t be finished until 2019. Since Coke announced the plan Oct. 21, its share price has fallen 2.2%.

ENLARGE

Analysts had been told there would be job cuts by November, but Coke says it is still determining how many people will be affected. Associated Press

“Their track record in cutting costs has not been very strong, so there’s a reluctance among investors to believe in them,” said Ali Dibadj, an analyst at Sanford Bernstein. He estimates Coke needs to cut $3 billion to $4 billion in costs to be as efficient as other major consumer packaged-goods companies.

——————-

Quoth the Raven

Long/short equity, event-driven, research analyst, activist investor

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15 Insane (But True) Reasons The Herbalife Fraud Should Be Shut Down Today

Dec. 26, 2014 6:00 AM ET  |  340 comments  |  About: Herbalife Ltd. (HLF)

Disclosure: The author is short HLF. (More…)

http://seekingalpha.com/article/2777145-15-insane-but-true-reasons-the-herbalife-fraud-should-be-shut-down-today

Summary

  • These are 15 reasons that the Herbalife fraud should have already been stopped – if not shut down immediately, placed under injunction until FTC investigation concludes.
  • Herbalife insider caught on video calling the company “an eventual deception” and “inauthentic”.
  • First hand primary source evidence points to Herbalife being the largest fraud since Madoff/Enron.
  • Questionable death in Mexico surrounded by 7-8 year old questions about the lead content in Herbalife’s product.
  • Herbalife Board Member Pedro Cardoso is wanted for fraud in Brazil. Enough is enough – shut it down.

Hello QTR fans. As many of you know, I’ve been writing primarily on my own blog, located here. Moving into 2015, Seeking Alpha has agreed to syndicate select pieces to my SA account, where I’ll also occasionally be penning pieces in the New Year. I look forward to the continued discussion and commentary from those who read me on SA, and extend my thanks to the SA staff for providing such a powerful platform for me to be heard on. Catch you in 2015!

Someone asked me earlier today if I should just consider this investment a success and move on. I’m somewhere near break even or possibly even in the black after paying for two years worth of (ridiculously expensive) put premiums and costs to borrow common, and Ackman is finally past break even. Why not quit now, use my brain power on something else, and say “screw it” to the outcome of this case? After all, it has been lengthy, it has been costly, and it has been dramatic.

I told the tale this week of my local Korean grocer. In it, there’s a line where people line up to buy cold cut sandwiches and other condiments for quick and easy meals while out and about in the city. The line can often get long and the staff has one speed: barely adequate. As such, often a line will make its way past the deli counter and back to the bowels of the store. From most parts in the line, a small sign hanging above the cash register is visible.

It reads: “You never need patience more than when you’re about to lose it.”

And, as I told a few people this week, that has become my de facto motto for this trade. Everything I needed to learn about patience I’ve learned from Bill Ackman and my Korean grocer. Maybe I should throw that onto my resume.

So, when I look to consider outcomes for this Herbalife (NYSE:HLF) investment, I make the case pretty quickly to myself about why I should stay short. I say to myself:

  1. “Self, the company is a fraud and the right thing to do for the human race, not to mention the economy, is to shut it down.”
  2. “Self, the company is crumbling from the inside out, the downside thesis for going short has never looked better and the risk of LBO or this company running back to $83 is minimal.”
  3. “Self, I can get a bit fascinated and obsessive. This is my one mulligan to my “no emotion” investing/trading rule. Everybody gets a mulligan.”
  4. “Self, I’ve spent 2.5 years doing non-stop research and not unlike how failing distributors feel, I’m pot committed.”
  5. “Self, the firsthand primary sourced evidence has never been clearer, and we believe the government can discern the facts from the obfuscation (albeit slowly).”

Since Mr. Ackman first laid out his original thesis on the Herbalife fraud, there’s been a few people who have carried the torch for his cause onward with the same stoic demeanor, from December 2012 until now. In that time, bears have endured a couple of the best reporting quarters in the company’s history, a flurry of bullish sounding LBO rumors, all time highs for the stock price, and some of the biggest names on Wall Street lining up on the other side of the trade. Withstanding that type of opposition isn’t an easy thing, and people like Seeking Alpha’s Matt Stewart (bear since 1/2013), Herb Greenberg (produced a documentary in early 2013), Bob Fitzpatrick, myself (bear since 1/2013) and Bill Keep have been the minority in Bill Ackman’s corner. Since then, we’ve been joined by many others who now blog and write critically about the company. I believe the pendulum is starting to swing in the direction of common sense (and the bears), and the public is starting to “get wise” to Bill Ackman’s analysis of Herbalife. Mr. Ackman, not a stranger to long-term shorts (MBIA took seven years), continued his systematic dismantling of Herbalife this week, releasing an internal video where an Herbalife distributor admits the company is “an eventual deception.”

**

Nine million people have been harmed by Herbalife and its false promises. More are being harmed every day. Here’s a Tweet I shared with the FTC a few weeks ago:

9 million ppl harmed (h/t @torontostewart) @EdithRamirezFTC @Josh_WrightFTC @TMcSweenyFTC @MOhlhausenFTC pic.twitter.com/1BxYt72OTR

– Quoth the Raven (@QuoththeRavenSA) December 1, 2014

This will make for an interesting study in human psychology, for sure. There’s probably still going to be a select group of people that, when Herbalife is pile driven by regulatory agencies, will ignore the massive fraud under the surface and claim it was all Bill Ackman’s fault. That’s just the lunacy of the financial markets and the public’s fundamental misunderstanding of them for you. “Market manipulation,” they’ll scream. “Buying the system!” and “Paying off regulators,” will likely be the misguided cries by those who defended people with the moral fiber of John Tartol and Michael O. Johnson, part and parcel with the biggest fraud since Madoff, Enron or that chick from Match.com who once claimed she really liked me.

The sooner the longs figure out that this trade isn’t about Bill Ackman, it’s about fraud, the more of a chance they have of getting out before all hell breaks loose. There’s a reason guys like David Einhorn take their knocks in short positions, like he has with Questcor/Mallinckrodt. That reason is: evidence. And, the evidence points to Herbalife being a worldwide confidence game.

In all seriousness, my conviction levels for this trade are at all time highs. As Mr. Ackman put it on Bloomberg last week, there really isn’t much of a bull case for owning the stock any longer. I wrote about this two quarters ago in my critically acclaimed, “Herbalife: POOF! There Goes the Bull Case.” The four biggest institutional investors are stuck in a long squeeze and the rest of the world has “seen the light,” driving Herbalife’s share price down from highs of $83 to lows in the $35s. The really amazing thing is that this still represents a $4.89 billion enterprise value on the company, which is roughly ten times the company’s estimated free cash flow for next year.

Perhaps Ackman should have just let the fraud perpetuate until a demise of its own making. Only in the world of finance would one of the world’s most successful hedge fund managers, making a 100% legal investment, committing 100% of his profits to charity, pointing out disgustingly blatant evidence of fraud, and claiming regulators should get involved, be viewed as the enemy.

Guy Adami Tweeted last week:

Before bouncing today, $HLF made a 52-week low. Maybe Ackman was/is on to something after all?

– Guy Adami (@GuyAdami) December 16, 2014

My buddy Matt Stewart so eloquently responded,

@GuyAdami If the most successful Hedge Fund Manager in the world this year tells you $HLF is a fraud it might be a good idea to listen no?

– Matt Stewart (@torontostewart) December 16, 2014

In the interim, the company continues to egregiously and perversely violate all kinds of rules: FDA rules, SEC rules, FTC rules, securities laws, the 1986 permanent injunction, common law precedents governing pyramid schemes, and just about every PR rule you can violate. As Walter Sobchak would say:

(click to enlarge)

**

So, without further ado (As Robert Klein would say, “what is ‘ado,’ and why can’t we have any more of it?”), here are 15 insane (but true) reasons this fraud should have been shut down already.

1. We Now Have an Insider, on Video, Admitting the Company is a Pyramid Scheme

Been under a rock for the last couple of weeks? Pershing Square released, in the last two weeks, two different videos. One video shows fraudulent health claims made by company distributors, breaking nearly every rule in the book. The second video, released last week, shows internal video footage from a top Herbalife distributor who admits that the company is “inauthentic” and “an eventual deception.” Here are some quotes from the white paper that accompanied the video:

(click to enlarge)

This one piece of evidence alone should be enough to do it. Instead, it’s a part of hundreds of bricks in the wall that make up the case against Herbalife.

2. BurnLounge Sets the Precedent: Herbalife Should be Shut Down

Very few people have gone back and read a lot of the pyramid scheme case law. Matt Stewart is one of those people. While reading the BurnLounge decision, which you can read here (h/t FT), you’ll see it upheld the Omnitrition case. Stewart makes a simple yet potent observation in a Tweet that he posted this past weekend.

If you don’t think Herbalife is a company built on selling the dream, and not the product, take a look at this video – or, all you have to do is scroll up and look at top distributor Stephan Gratziani’s words: “The Herbalife business model is based on distributors purchasing volume from them… The Herbalife business model, at this point in time, is not based on customers purchasing, it’s based on distributors purchasing volume.” (Video 2, 14:34.).

Done and done.

3. The Company Doesn’t Seem to Care for Securities Law

A baffling occurrence came when Herbalife was initially defending itself and trying to prove it was making “retail sales.” I’ve talked about this ad nauseam during previous articles on Herbalife. Long story short, Des Walsh gave this answer to the retail sales question on a conference call:

Then, Herbalife changed Des’s answer to “We don’t track this number and do not believe it is relevant to the business or investors.”

Then, CEO Michael Johnson, sounding like he had just finished the Iditarod, furiously answered questions on CNBC with regard to this issue, sounding half annoyed and half like he just got done playing a game of full court basketball.

Then, he comes out to say that 90% of distributors are buying their own product.

Guys, why not take a copy of Reg FD and just light it on fire on national television? Not only are these examples all over the board, but some of the admissions from Johnson are clear evidence that can be used against them. Is it any wonder Mr. Johnson isn’t doing too many on-air interviews anymore?

Let us also not forget the “exoneration” talk that hit the airwaves just days before one of Herbalife’s worst earnings displays in years. Here’s the two separate messages the company was giving about the FTC investigation. One is before the investigation and before the horrible earnings display, the sad-sack version is the one that came out “after the damage was done.” I investigate both of these in a Tweet:

$HLF – I am still waiting on an explanation for this. @SEC_Enforcement @FBI @FTC @JulieBrillFTC @ScottWapnerCNBC pic.twitter.com/k4AaGBOCLh

– Quoth the Raven (@QuoththeRavenSA) November 19, 2014

I’ll make my argument here by posing a number of questions:

  • Do you think it is a coincidence that Herbalife’s poor earnings were pushed out onto a date well past when they usually reported Q3?
  • Do you think it is a coincidence that the week prior to Herbalife’s poor earnings Michael Johnson did a 20 minute interview with LA Mag?
  • Do you think it is a coincidence that the week prior to Herbalife’s poor earnings, certain news outlets were reporting the company would be exonerated, causing a seismic intraday shift in the company’s stock more than once, on days this occurred?

 

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What Happened When Marissa Mayer Tried to Be Steve Jobs

By NICHOLAS CARLSON DEC. 17, 2014

Eric Jackson was sitting in his hotel room on Sea Island, Ga., watching his kids splash around in the pool, when he clicked “publish” on his latest blog post for Forbes.com. Jackson, an influential hedge-fund manager, had become fixated on Yahoo and the efforts of its chief executive, Marissa Mayer, to turn around the enormous yet floundering Internet company. It was July 21, 2014, almost exactly two years to the day since Mayer took over, arriving at Yahoo’s headquarters to an unfurled purple carpet and Shepard Fairey-style “HOPE” posters bearing her face. During those 24 months, Mayer eliminated dozens of products and rebooted others. She acquired 41 start-ups and even hired Katie Couric. But just one week earlier, Mayer announced the company’s lowest quarterly earnings in a decade. Jackson argued in his post that Yahoo no longer made sense as an independent entity. Instead, it might be a nice takeover target for one of the tech industry’s Big Four: Apple, Facebook, Amazon or Google.

 

Lumber Liquidators LL Tesla Whitney Tilson K12 Questcor Pharmaceuticals QCOR
Whitney Tilson picture courtesy of Kase Capital