The four-year battle between hedge fund billionaire Bill Ackman on one side and Herbalife Ltd. (NYSE:HLF) and Carl Icahn on the other appears to be over, and the massive rally in HLF stock Friday tells you who won.
HLF said it reached a $200 million settlement with the Federal Trade Commission and agreed to change some business practices to avoid being classified as a pyramid scheme.
That kind of destroys then entire premise of Ackman’s short position in Herbalife stock, which stood at $1 billion when he dramatically revealed it back in 2012.
Famously, Ackman’s billionaire nemesis Carl Icahn took the long side of the HLF trade, and it has been two dogs with one bone ever since.
It must be a bitter pill for Ackman to swallow, especially since he cast his short position in HLF stock as an altruistic crusade against a company that was essentially running a scam. Apparently, the FTC disagreed, and now it’s Carl Icahn’s turn to gloat.
Herbalife said it granted the activist investor the right to boost his stake to 34.99% of the company from a previous limit of 25%. Icahn currently owns 18.3% of all HLF stock outstanding.
And gloat he did. Icahn had this to say in a statement:
“Unlike many of those that ‘shorted’ Herbalife, we did not rely on one or two research papers prepared by non-experts. As a result of our research, over three years ago we concluded that Herbalife was not a pyramid scheme. The FTC settlement announced today, coming after a two-year investigation also concluded that Herbalife is not a pyramid scheme — a conclusion that obviously vindicates our research and conviction. While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject. Simply stated the shorts have been completely wrong on Herbalife. Now that the Company has reached a settlement with the FTC, it is time to consider a range of strategic opportunities, including potential roll-ups involving competitors, as well as other strategic transactions.”
HLF Stock Still Kind of Sketchy
The Herbalife stock short hasn’t looked like it was going to turn out well for Ackman for years. Just look at how HLF stock has traded since 2012.
Through years of volatile trading, HLF was up about 40% on this short before it popped on Friday. The latest action gives Herbalife shares a gain of over 50% since the day before Ackman started his campaign.
It’s been a nightmare couple of years for Ackman and his Pershing Square Capital Management hedge fund. Its disastrous stake in troubled Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stole the show from his long-suffering HLF short. Knocked out of the spotlight, it was almost easy to forget how badly that HLF stock thing was going for him.
For retail investors, this battle of the masters of the universe means nothing from this point forward.
Most of the immediate upside in HLF stock was exhausted in the initial trading. Now that the regulatory and legal risks casting a pall over shares have been lifted, the market has to go back to valuing Herbalife stock solely on its fundamentals.
It’s likely to be disappointed. Sluggish sales growth, declining earnings per share and negative long-term growth rate make HLF look pretty unattractive divorced for all the billionaire drama.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.