Ackman Switches Tactics In Fight Against Herbalife
Shares in weight loss company Herbalife Ltd (NYSE: HLF) dipped sharply today on yesterday’s news that activist investor Bill Ackman is retreating on his enormous short trade against the company. Ackman’s Pershing Square has swapped more than 40 percent of his $1 billion Herbalife equity short for long-term put options. Ackman has been quoted as saying that shutting down Herbalife would be the ”greatest achievement of his life.” He has accused the company of being the most well managed pyramid scheme in the world. Now it looks like he’s changing strategy in his war against HLF in an attempt to mitigate Pershing Square’s losses on the investment, which have soared into the hundreds of millions so far.
Ackman has not thrown in the towel, but he is protecting his company. In a letter to investors yesterday, Pershing Square reiterated Mr. Ackman’s contention that Herbalife is a pyramid scheme that engages in unlawful and deceptive business practices and that it is only a matter of time before the Feds step in and shut it down. In an explanation of the share swap the letter states:
In order to mitigate the risk of further mark-to-market losses on Herbalife, in recent weeks we have restructured the position by reducing our short equity position by more than 40% and replacing it with long-term derivatives, principally over-the-counter put options. The restructuring of the position preserves our opportunity for profit if the Company fails within are reasonable time frame we will make a similar amount of profit as if we had maintained the entire initial short position while mitigating the risk of further substantial mark-to-market losses because our exposure on the put options is limited to the total premium paid. In restructuring the position, we have also reduced the amount of capital consumed by the investment from 16% to 12% of our funds.”
In December of 2012, Ackman revealed that he was shorting 20 million shares, or $1 billion, worth of Herbalife stock with a price target of $0 in an attempt to drive the controversial weight loss company out of business. That hasn’t worked out so well. Since then, shares of the company have risen more than 71 percent and Pershing has lost an estimated $500 million. Herbalife’s CEO, Michael Johnson, has called on the U.S. Securities and Exchange Commission to pursue Ackman for blatant market manipulation. Ackman is not the first to make a case against Herbalife. David Einhorn, well-known for his achievements in shorting stocks, was asking hard-hitting questions of Herbalife’s management months ago.
Shares of Herbalife are trading on average volume today but have lost over 7 percent thus far.
Disclosure: The author has no position in the stocks mentioned in this article, and does not intend to initiate any position in the next 48 hours.
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