Herbalife: Advantage Ackman?

April 30, 2014
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In January 2013 we wrote about “Lessons in Hubris from the Herbalife Spectacle.” This was around the time Bill Ackman was grandly pounding the table for HLF as a “zero,” with Dan Loeb of Third Point (another hedge fund titan) taking the other side of the trade. (The epic battlefest between Ackman and Icahn came later.)

A lot has happened since then — though the hubris lessons still stand. The guys who are “never wrong” wield a battle shield of pride, and sooner or later they come home on it.

To Ackman’s credit, though, the Herbalife bet was sized to give him staying power. They tried to squeeze him and he stuck it out… which makes the current picture interesting.

This from Matt Levine, on HLF’s just-reported earnings, caught our eye:

Net income for the quarter ending in March was $74.6 million; cash flow from operations was $190.6 million; amount going out the door for share repurchases was $694.5 million, and that doesn’t count another $123.8 million for capped call transactions. Or the $255 million that Herbalife spent over the first 18 trading days in April to buy even more stock. That’s a total of more than $1 billion spent on buying back shares, one way or another, almost equal to the $1.15 billion that Herbalife raised in its big convertible bond offering in February.

Those are irresistibly big numbers, and I did not resist them. Here are Herbalife’s share repurchases, as a percentage of daily volume:

click for full size

click for full size

- Matt Levine, Herbalife Sure is Buying a Lot of Stock

When a company buys back shares, their aim and hope is to support the share price. There is a long-term calculus of distributing future earnings over a smaller share base — but in the shorter term, you would still like to see some positive movement. Especially if you are buying back stock as a deliberate counter-offense against a big hedge fund manager trying to sink you.

Thus what we find interesting, as traders, is the utter failure of those big repurchases to “move the needle” in terms of constructive price action…

click for full size

click for full size

One wonders, too, how many investors and copy-cat funds bought HLF shares in expectation of an Ackman ‘squeeze’ that hasn’t materialized. Could their exit be the supply offsetting HLF buyback demand?

There are many moving parts to the Herbalife drama. But given the failure of share buybacks to do more damage, we’d say the short term advantage is to Ackman… and the bears…

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