Having won the battle with Bill Ackman over the existential legality of Herbalife, which a month ago was found to not be a pyramid scheme after paying a $200 million fine and agreeing to make changes to its business, Carl Icahn, who owns 18% of the nutritional company, has found himself in a curious place: with no further upside catalysts and with the company levered to the neck with recent buyback-funding debt issues, there is litle upside left. In fact, the stock has been drifting lower ever since the settlement. Which is why, perhaps it is not surprising, that as the WSJ reported overnight, Icahn has been quietly shopping his stake in Herbalife to a group “including the company’s arch-nemesis William Ackman, another surprising twist in a battle between billionaires that has riveted Wall Street for years.”
Citing “people familiar with the matter”, WSJ notes that Jefferies has been seeking over the past month to find buyers for Mr. Icahn’s 18% stake, which is worth roughly $1 billion. The status of the talks and which other investors may be involved wasn’t clear and Mr. Icahn may sell nothing in the end.
Ironically, a “novating” transaction between Icahn and Ackman would make sense: with the stock generating healthy cash flow, even if massively levered, it may stay in its current price range for a long time (even if it is, as we dubbed it several quarters ago, a “melting ice cube”), which provide little incentive for Icahn to keep holding to it as a long, especially since it is not an attractive acquisition target. On the other hand, Ackman continues to bleed theta on his blended $1 billion put position, with no imminent “terminal” catalysts on the horizon. As such, a deal between the two billionaires has long been rumored as a potential backdoor settlement in a market so illiquid, that either of the two trying to sell the stock in the open market would result in major stock price moves.
As the WSJ notes, the fact that he even entertained selling his shares, by far the biggest single stake in Herbalife—and that Mr. Ackman could be a buyer—adds more drama to a tug of war over a once-obscure nutritional-products company that Mr. Ackman says is a pyramid scheme, an allegation it denies. The latest development is especially surprising given that just a month ago Mr. Icahn expressed renewed confidence in Herbalife, which in settling a closely watched Federal Trade Commission probe announced he was allowed to boost his stake to just below 35%.
One factor which may explain Icahn’s desire to offload his shares is his dramatically bearish bias to the overall market. As a reminder, as of June 30, his Icahn Enterprises was -149% net short, a position which has hurt the fund straddling it with a double digit YTD paper loss. WSJ adds that “Icahn has been selling several stocks this year amid his wariness of the overall market, even ones in which he has expressed confidence. In April, for instance, Mr. Icahn exited Apple Inc., which had been his biggest investment and whose shares he often predicted would rise dramatically. At the time, he said he continued to support the company’s management and believed it would flourish, but he had made a large profit.”
On the other hand, “that Mr. Ackman would consider buying, however briefly, into a company he has waged a crusade against is less surprising than it might seem. He had only signaled willingness to buy a small portion of the stake, one person said. He has long blamed Mr. Icahn for boosting the stock, saying it’s something he hadn’t bargained for when he plotted the campaign. “I would love to find a way to get Carl out of the stock,” Mr. Ackman said at CNBC’s Delivering Alpha conference in July 2014.”
Perhaps explaining the time-sensitive nature of Ackman’s positioning is that his stake has been mostly built up using derivatives, and as such the longer the war over the final fate of Herbalife continues, the greater Ackman’s losses. Ackman’s carry is said to be between negative $50 and $100 million annually. In July, CNBC reported that “it has been three years and [Ackman] has lost hundreds of millions of dollars. He admitted in the Fortune piece that it as costing him more than 100 million a year in carrying cost.” Ackman then suggested that the real number is about half that.
In any case, whatever resolution there is, if any, will be a loss for everyone else, if only in purely theatrical terms.
Wall Street has often appeared more captivated by the thrill of watching two giants of investing go toe-to-toe than by the underlying issue of what qualifies as a pyramid scheme or a legitimate business.
We expect that Icahn will come out with a statement defending his existing position (and likewise the same for Ackman) soon, perhaps even sooner if HLF opens substantially lower on the news.
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