December 20, 2012 / 1:00 PM / 7 years ago

Pershing Square's Ackman shorts Herbalife; stock skids

(Reuters) - Activist investor William Ackman confirmed on Wednesday that he is betting against the stock of Herbalife Ltd (HLF.N) in a move that sent shares of the weight management product company reeling and sparked a caustic rebuke from its chief executive officer.

William Ackman, Chief Executive Officer of Pershing Square Capital Management LP talks to reporters before entering the AGM of Canadian Pacific Railway Ltd. in Calgary May 17, 2012. REUTERS/Jack Cusano

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 Stock Exchange.

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 (CP.TO), 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 (PG.N) and JC Penney (JCP.N), 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 his move.

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 model.”

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 BTH.N, 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

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