Billionaire investor Carl Icahn took a 13 percent holding in Herbalife Ltd. and said he would seek talks with the nutritional-supplements company, raising the stakes in a public dispute with rival hedge-fund manager Bill Ackman over whether the company is a legitimate business.
Icahn, 76, said strategic alternatives for Herbalife may include taking it private, according to a filing Thursday with the U.S. Securities and Exchange Commission in which he reported his stake. Herbalife rose 1.2 percent after gaining as much as 17 percent earlier.
Further stock purchases or going private may increase Herbalife’s share price and put pressure on Ackman, who disclosed in December that his Pershing Square Capital Management LP had sold short 20 million shares of Herbalife, calling the company a pyramid scheme. Icahn, reviving a decade-old feud in an interview with Bloomberg Television last month, has said Ackman, 46, was “disingenuous” and his trade may become the “mother of all short squeezes.”
“The bigger the short position, the more enticing it is,” Icahn said Friday during an interview on CNBC. “The fact that you have a major short position is one of the indices I look at” in buying a stock.
In a short sale, an investor borrows stock and then sells the shares in anticipation of returning them at a lower price in the future. A short squeeze occurs when other investors begin buying the same stock, pushing its price up and forcing the short seller to buy back the shares, possibly at a loss.
Herbalife pared gains after Icahn’s comments today and as Robert Chapman, another hedge fund manager who had bought Herbalife stock, said he had sold his position. Chapman, speaking Friday in an interview with Deirdre Bolton on Bloomberg Television’s “Money Moves,” said he sold his stake as the shares soared last Thursday and Friday, exiting at prices ranging between $47 and $49 a share. Chapman said he would reinvest should Ackman’s effort to spark an investigation of Herbalife push the stock back into the “thirties.”
Ackman first disclosed his bet against Herbalife on Dec. 19 and a day later appeared at a Sohn Investment Conference in New York, accusing Herbalife of using inflated pricing, misleading sales information and a complicated incentive structure to hide a pyramid scheme. The stock has dropped 8.9 percent since Dec. 18, to $38.74.
Herbalife executives and consultants hit back on Jan. 10, arguing that all of Herbalife’s payments to distributors are tied to product sales and the company’s accounting practices are legal.
Icahn said in the CNBC interview that his decision to invest in Herbalife was driven by the opportunity to make money, not a personal vendetta against Ackman, his opponent in a seven- year-plus legal battle over a $4.5 million claim.
“I’m not going to lie to you and say, ‘If Ackman gets squeezed, I will feel very sorry’,” Icahn said today. “But that is not the reason I am doing this.”
Icahn said that Herbalife is at the center of a “paradigm shift” in which people are becoming more concerned about nutrition and obesity. Its multilevel marketing approach provides an effective way to sell products in countries that don’t have the retail infrastructure of the U.S., Icahn said, adding that the Internet makes it easier for Herbalife representatives to reach potential customers.
Ackman in an interview questioned whether Icahn’s investment is just for show, adding that shareholders who own Herbalife stock will lose money. On Feb. 7, Ackman renewed his thesis on Herbalife in a detailed 40-page treatise questioning everything from the company’s sales accounting to claims that it makes millionaires.
U.S. regulators at the Federal Trade Commission and the SEC have declined to say whether they are investigating Herbalife or intend to do so.
Herbalife has repeatedly denied Ackman’s accusation that it is a pyramid scheme.
Ackman built a “very deep Rolodex” of contacts among state and federal regulators through a prior bet against MBIA Inc., Chapman said today. “All he needs is just one of those guys” to start an investigation, Chapman said, and it will make it “look like Ackman will win.” Chapman predicted that Ackman’s strategy will eventually fail though.
Ackman began shorting Herbalife shares in May, according to investors, and disclosed the trade on Dec. 19. In that period, Herbalife shares traded at an average price of $48.58 each, according to data compiled by Bloomberg.
Icahn, who didn’t respond to a telephone request for comment, purchased about 1.6 million Herbalife shares between Dec. 20 and Dec. 24, according to the filing. After first challenging Ackman’s strategy in a Jan. 24 interview with Bloomberg Television, he resumed building the stake. On Jan. 28 and Jan. 29, Icahn acquired another 3.6 million shares and options. He purchased the remainder of his stake, comprised of 2.47 million shares and options on another 11.54 million, through yesterday, according to the document.
Ackman’s wager had already put him at odds with Daniel Loeb, founder of Third Point LLC. Three weeks after Ackman disclosed his bet against Herbalife, Third Point reported in a regulatory filing that it had bought 8.9 million of the company’s shares, an 8.2 percent stake.
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