(Adds Herbalife CEO response and background)
By Svea Herbst-Bayliss
Dec 19 Activist investor William Ackman
confirmed on Wednesday that he is betting against the stock of
Herbalife Ltd in a move that sent shares of the weight
management product company reeling and sparked a caustic rebuke
from its chief executive officer.
Ackman, who oversees $11 billion in assets at Pershing
Square Capital Management, told Reuters that he was shorting
Herbalife when asked about the matter on Wednesday. The
company's share price tumbled more than 12 percent, becoming, at
one point, the day's biggest percentage loser on the New York
Ackman is one of the world's most closely watched hedge fund
managers and invests in a handful of companies, where he often
pushes for change from the inside. Earlier this year, he won a
proxy contest at Canadian Pacific Railway, which helped
him unseat top management.
His latest move in Herbalife could spur other short-sellers
to follow suit, industry analysts said.
On Thursday, the fund manager is scheduled to lay out his
argument for the move at a hastily arranged investment
presentation in New York. But Wall Street was already abuzz with
the move on Wednesday afternoon when his position became public.
The move is particularly noteworthy because Pershing Square
became the first hedge fund to publicly acknowledge its short
position in Herbalife, with some investors beginning to
question its business strategy.
The fund is best known for taking long positions in
companies, like Procter & Gamble and JC Penney,
which it is pushing for change.
Herbalife is a global direct-selling company that sells
weight-management products, nutrition supplements, energy drinks
and skin-care lotions through 2.7 million distributors in 81
countries. Distributors make money based not only on their own
product sales to consumers but on the sales of others they
sponsor and bring into the business.
As the news of Ackman's position spread, so did reaction to
Herbalife CEO Michael Johnson, speaking on CNBC, said the
United States "would be better when Bill Ackman is gone."
Later Wednesday, Johnson responded in a public statement to
what he said were Ackman's allegations about Herbalife operating
like a "pyramid scheme."
"The allegation that Herbalife is a pyramid scheme is bogus.
Make no mistake: Today's announcement isn't about Herbalife's
business model," he said. "It's about Bill Ackman's business
Johnson added: "We urge the SEC to investigate these series
of events to protect the rights of investors. This appears to be
yet another attempt to illegally manipulate the market by a
group of overzealous short-sellers."
Meanwhile, bearish options activity in the stock jumped.
"I am seeing about 8,200 December $35 strike puts being
bought all around 2:30 p.m. eastern time. This is being
accompanied by a rise in the implied volatility for the next 30
days in Herbalife options, suggesting massively higher risk for
shares in the near term," said Ophir Gottlieb, managing director
of options analytics firm Livevol in San Francisco.
Put options are often taken as a bet against a stock. Buying
the $35 strike price suggests the investor in question believes
shares will fall below that level by expiration Friday.
Herbalife shares closed on Wednesday at $37.34, down $5.16,
or 12.14 percent.
Shares in Blyth, another nutritional supplement
maker, also tumbled. They fell 12 percent, ranking as the day's
second-biggest loser behind Herbalife.
For Ackman's investors , the move in Herbalife is sure to
provide a boost at the tail end of an otherwise frustrating year
in which large losses in JC Penny have hurt the fund. Through
November, the main fund is up roughly 7 percent, and thanks to a
bounce in JCP in December, the fund is up about 3 percent this
month, one investor said.
It is believed that Ackman is not alone in his worries about
Herbalife. Other traders who normally short stocks are also said
to be targeting Herbalife.
A person familiar with the thinking of some of the short
sellers said multi-level marketing companies begin operating
like a pyramid scheme when most of their sales are to other
distributors of the product, as opposed to people who have no
connection to the company.
One notable investor believed to be shorting Herbalife is
Jim Chanos, president and founder of Kynikos Associates,
according to a person familiar with the hedge fund manager.
In May, hedge fund manager David Einhorn, who runs
Greenlight Capital, asked Herbalife executives about what
percentage of its products are sold to consumers who are not
distributors and was told that "we don't have visibility to that
level of detail."
Investors had expected Einhorn to make negative remarks
about the stock publicly when he presented his best stock ideas
at the Ira Sohn Investment conference in May, which benefits
childhood cancers. But he was silent on Herbalife. Shares of
Herbalife subsequently rose more than 16 percent on the day.
Einhorn declined to comment on his position on Wednesday.
Ackman will detail the reasons for his bet against
Herbalife, which he's calling his "new investment idea," at what
is being billed as an "Inaugural Sohn Conference Special Event"
on Thursday in New York.
(Additional reporting by Doris Frankel and Caroline Humer;
Editing by Gerald E. McCormick, Jennifer Ablan and Dan Grebler)