BOSTON Dec 20 Hedge fund billionaire William
Ackman is facing mounting pressure as his high-stakes bet
against nutrition and weight loss company Herbalife
enters its second year, but for now, his investors look ready to
stick with him.
The founder of Pershing Square Capital Management has seen
the value of his $1 billion short play against Herbalife lose
nearly three-quarters of a billion dollars in 2013, making it
one of the 10-year old fund's riskiest bets.
And if equity analysts and his billionaire rivals, Carl
Icahn and George Soros - who own chunks of Herbalife stock - are
right about the company's growth prospects, that bet could look
even worse in the next several months.
After an audit by PricewaterhouseCoopers gave Herbalife's
books a clean bill of health this week, one year after Ackman
publicly called the company a pyramid scheme, analysts said it
was only a matter of time before Herbalife buys back shares.
This prompted D.A.Davidson & Co. analyst Tim Ramey, a
long-time Herbalife bull, to raise his price target for the
company's shares to $115 from $92. Janney Montgomery Scott
analysts, meanwhile, lifted their price target to $85 from $79.
That is a far distance from the $33.74 where the stock
closed a year ago on December 20, 2012 the day Ackman made his
allegations plus his prediction that regulators would shut the
company down. His presentation and speculation the day before
that he was short the stock had pushed the stock price down 21
percent in two days.
Even in the face of a 137 percent stock gain since then,
Ackman has said he will take his short bet against the company
"to the end of the earth" - a clear sign he intends to hang on
to the position.
And investors who know Ackman's history say the 47-year old
can be patient. He waited three years before getting out of his
losing J.C. Penney bet and seven years before his bet against
bond insurer MBIA paid off. To guard against investors getting
cold feet and leaving him too quickly, he forces them to lock up
their money longer than many others, something analysts say
makes sense for his activist strategy.
"So long as (Ackman's) view and conviction do not change,
the correct thing for him to do is hold the position," said
Michael Weinberg, a professor at Columbia University's business
school and chief investment officer at an investment adviser
based in New York, adding that he had no opinion on Herbalife.
"(Ackman) has had many positions where he has ultimately been
right, but a few years early," he said.
But much will depend on his investors and how long, if at
all, before federal agencies act.
"He is still having a decent year, despite the J.C. Penney
loss and the Herbalife problems, and that says that he is still
more right than he is wrong," said one investor, who asked not
to be named because he was not authorized to speak publicly
about his firm's investments.
Ackman has some room to breathe. Lucrative bets on real
estate and rail have kept him in the black in 2013 with the fund
up 10 percent in mid-December. While he trails the Standard &
Poor's 500 25 percent gain, Ackman is doing far better than the
average hedge fund, which is up only 6 percent.
Gains in Canadian Pacific Railway and real estate
company Howard Hughes Corp are the portfolio's growth
engines and even if Ackman realized his Herbalife losses today,
his fund would be well into the black.
But there is some evidence he is stepping up his efforts to
push regulators to take the kind action he needs for his bet to
ultimately pay off. For the first time, he has hired lobbyists
in Washington - including Wexler & Walker - to press his views,
someone familiar with the fund said.
Privately, Ackman has told investors in the last months that
he remains cautiously optimistic regulators will act, especially
after he and rights groups have brought the issue to the
attention of some states' attorneys general.
HUGE AND GROWING
But the Herbalife losses are huge and growing. Based on what
Ackman paid to short roughly 20 million shares in Herbalife, his
losses have now climbed to about $700 million, investors have
estimated. Pershing Square did not comment, but Ackman told
Bloomberg in late November the position then was down $400
million to $500 million.
The fact that analysts and investors now expect the company
to raise new money and repurchase shares in the wake of the
PricewaterhouseCoopers reaudit could propel the company's stock
even higher and turn Ackman's battle against Herbalife into a
battle against the clock.
"There are only so many points at which this bet could take
a turn, and getting this audit was clearly one of them," said
another investor in Ackman's fund.
The high-stakes standoff comes amid growing scepticism in
medical spheres over the value of dietary and vitamin
supplements. Recent studies and an editorial published in The
Annals of Internal Medicine have suggested they provide no
health benefits, and should be avoided. ()