January 9, 2013 7:49 pm

Hedge funds lock horns over Herbalife

Two of the biggest names in the hedge fund world locked horns on Wednesday when Dan Loeb’s Third Point disclosed an 8 per cent stake in Herbalife, the direct seller that is under attack from Bill Ackman’s Pershing Square.

The contest between the rival billionaires centres on the business model of the company, which distributes nutritional supplements in 84 countries and is a prominent sponsor of sports clubs, including the LA Galaxy and FC Barcelona football teams.

In what he has characterised as a $1bn “patriotic short”, Mr Ackman has sold about 20m shares of Herbalife, almost a fifth of the $4.3bn market capitalisation of the direct seller, which he charges is an illegal “pyramid scheme”.

The intervention of Mr Loeb – who last year made a $500m profit with a counterintuitive bet on Greek bonds at a time when many feared the country would be forced out of the eurozone – pushed shares in Herbalife up as much as 9 per cent in the morning in New York, causing a temporary halt to trading.

The support of Third Point, with a stake valued at about $340m before Wednesday’s jump, is a boost to Herbalife, which denies it is a pyramid scheme. It comes on the eve of a presentation to shareholders and analysts in which the company is expected to rebut, in detail, the allegations made by Mr Ackman in a presentation laid out on December 20.

Mr Ackman said in a statement on Wednesday that he welcomed any investor “who brings additional sunlight to the situation” and that “the outcome of this investment is not about Pershing Square or anyone else who is long or short the stock”.

In the days after Mr Ackman’s December presentation, Herbalife shares dropped more than a third. They have recovered most of those losses as investors have digested Pershing’s case and speculated that a large share buy-back will be announced by the company on Thursday.

Mr Ackman’s central charge is that Herbalife operates with the primary aim of recruiting distributors into its network – the chief characteristic of a pyramid scheme – rather than selling products to consumers.

In a summary of that case on a Pershing Square website detailing its source material and arguments, Mr Ackman criticised Herbalife’s claims about the potential rewards of becoming a distributor and said that about “92 per cent of participants’ income is from recruiting”.

Herbalife declined to comment. Third Point did not respond to requests for comment.

Herbalife’s market capitalisation is still far below the $8bn level of April last year, before another short seller, David Einhorn, intervened on an earnings call to question the nature of its retail sales.

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