Ackman Q3 Letter: Recent Developments At Herbalife Ltd. (HLF) Reinforce Our Short Thesis

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Bill Ackman had a good Q3 up 6.4% and the streak has continued into October with a YTD return (through the end of the month) of 43.4%, although recent data from Hedge Weekly has the investor ‘only’ up 35.29% through November 18th. ValueWalk has obtained Ackman’s Q3 letter to investors, which discusses his recent IPO, positions in AGN, HLF, ZTS and others. Further analysis to follow.

Bill Ackman

Dear Pershing Square Holdings, Ltd. Shareholder:

The portfolio of Pershing Square Holdings, Ltd. (“PSH”) outperformed the major market indexes for the third quarter of 2014, year-to-date and since inception as set forth below1:

The PSH IPO was completed on October 1, 2014 on the Euronext Amsterdam exchange with a capital raise of $2.73 billion from new investors. An additional $212.5 million was raised from existing investors in Pershing Square International, Ltd. who elected to roll over their investments to PSH, and from Pershing Square employees who invested $129 million of additional capital. When combined with existing assets, this capital raise translated into an initial public capital base of more than $6.2 billion.

As this is our first letter to the public shareholders of PSH, we thought it would be useful to share how we think about PSH and our long-term goals for the company. Our long-term goal is to compound our capital at a high rate of return while minimizing the risk of permanent loss of capital. While the structure of PSH is that of a closed end fund, we think of PSH as akin to an investment holding company. We expect to continue to concentrate the substantial majority of our capital in about 8 to 12 investments, and estimate that our typical holding period will belong-term, typically four or more years. Our “subsidiaries” are represented by large minority stakes in a handful of public companies. Typically, we are the largest or second largest

shareholder, may have representation on the board, and, at a minimum, have substantial influence by virtue of our large stake and active voice.

Our first fund, Pershing Square, L.P. (“PSLP”), began investing capital on January 1st, 2004. Since inception, PSLP has compounded its capital at 21% per annum. Despite these strong returns, our open-ended structure has prevented us from investing our capital in an optimal fashion. While our activist approach to investments has generated large returns on capital, historically we have deployed, on average, only about two-thirds of our capital in this strategy. The balance of our funds has been invested in cash and passive value investments, which have generated minimal returns. Being forced to sell an investment in the middle of an activist campaign can be damaging to the execution of that investment, and, as a result, we have historically set aside cash and liquid passive investments to minimize this risk.



Herbalife Ltd. (NYSE:HLF) Short

Third Quarter Share Price Performance: -32.21%

Recent developments at Herbalife reinforce our short thesis that HLF is an illegal pyramid that will collapse or otherwise be shut down by regulators. Since Herbalife’s last earnings announcement, the stock has declined significantly. Herbalife’s third quarter earnings miss and reduced guidance contributed to Herbalife’s stock price decline to 52-week lows. On November 5th, the stock price continued its decline from a recent high of $55.90 to close at $39.78 – a drop of nearly 30% in two trading days, on high volume.

On October 23rd, Orion Research, with the assistance of Pershing Square, published an in-deptharticle on Herbalife Venezuela (which you can read at In summary, the article asserts that Herbalife has realized distorted growth and artificial profits in Venezuela in recent years as inter- company currency policies have created a mechanism for distributors to circumvent and arbitrage official local currency controls. In its September 30, 2014 10-Q, Herbalife finally acknowledged that its use of a 10.7 to 1 bolivar/dollar exchange rate was unrealistic and took an impairment charge using a 50 to 1 rate at the end of the third quarter. The reduced guidance in the fourth quarter and fiscal year 2015 is partly a result of the reduced earnings from the change to a 50 to 1 bolivar/dollar exchange rate, which materially reduces reported revenues and profitability.


Full letter below – stay tuned for further analysis

Pershing-Square-Holdings-Ltd.-Q3-Investor-Letter – PDF

Ackman Pershing Square Holdings Ltd. Q3 Investor Letter Nov 25

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