Herbalife a Playground for Activist Investors

Herbalife a Playground for Activist Investors

Herbalife has become the ultimate financial plaything.

Carl C. Icahn cemented the status by joining uppity investors William A. Ackman and Daniel S. Loeb in the war over the nutritional supplements seller. One idea of his is for Herbalife to go private — again. The controversial business model and rich cash flow make it easy for Wall Street to keep imprinting fresh narratives on the company.

The renewed batting around of Herbalife began last April when another agitator, Greenlight Capital’s David Einhorn, raised questions about whether the “distributors” of Herbalife weight-loss powders and vitamins actually sell them to other customers or mainly consume them personally. The shares swiftly tumbled from over $ 70 apiece to $ 46.

Then Mr. Ackman, founder of Pershing Square Capital, came along at the end of 2012 with his $ 1 billion short thesis about the company being a doomed pyramid scheme. That pushed the stock well below $ 30.

Third Point’s Mr. Loeb gave the market something else to think about. He said Mr. Ackman was trotting out a tired, old bogeyman about multi-level marketing and that government action against Herbalife was unlikely. Mr. Loeb pointed to a $ 950 million stock buyback plan as a reason to buy.

Mr. Icahn, the fourth activist to weigh in on Herbalife, disclosed a 13 percent stake on Thursday, sending the shares up initially about 14 percent. The 76-year-old billionaire, whose personal animosity toward Mr. Ackman blew up in spectacular fashion last month live on CNBC, reckons that Herbalife is ripe for a leveraged buyout.

It’s an idea as old as Mr. Ackman’s skepticism. Private equity firm J.H. Whitney took Herbalife private in 2002 after the founder’s tabloid-fodder death sent the shares plunging. About two years later, Herbalife returned to the public markets, minting J.H. Whitney a fortune. In 2007, the firm tried to repeat the trick, but shareholders shot down the $ 38-a-share buyout offer.

For a company whose business is hard to comprehend and which operates in a constantly challenged gray area, it’s easy to alter perceptions. Its stock is 80 percent more volatile than average, according to Thomson Reuters data. The many varied and confident opinions about Herbalife seem to have equally powerful influence. That’s why it’s so important for these multi-millionaire investors to get in the last word.

Robert Cyran is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.


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