By Steve Gelsi, MarketWatch
Reuters
NEW YORK (MarketWatch) — Herbalife Ltd. shares sank 10% from the day’s highs after hedge fund manager and short-seller Bill Ackman said the company’s nearly three-hour presentation to Wall Street — a detailed rebuttal of accusations that the firm was a pyramid scheme — did nothing to change his mind.
At the closing bell, Herbalife (NYSE:HLF) dipped 1.8% to end the session at $39.24 a share. The stock had risen nearly 8% in morning trade as the nutrition-products makers’ senior executives blasted Ackman’s late-December accusations, which had sent the shares to a two-year low. Trading volume was heavy: 27 million shares changed hands or nearly four times the daily average.
Hedge fund standoff over Herbalife
Paul Vigna and Emily Glazer discuss the standoff between Herbalife and two hedge funds. Photo: Reuters.
“The attack is sad to me,” Herbalife Chief Executive Officer Michael Johnson told investors gathered at the Four Seasons Hotel in midtown Manhattan. “The Girl Scouts sell cookies on a direct method and no one attacks them.” The comment drew some chuckles from the crowd at the meeting.
Get blow-by-blow of Herbalife presentation on The Tell’s live blog.
In a statement fired off after the presentation, Ackman, who runs the Pershing Square fund, stuck to his thesis: that Herbalife’s method of selling through individual distributors amounts to a pyramid scheme. Read more on Ackman's Thursday response.
Ackman said the company “distorted, mischaracterized, and outright ignored large portions of our presentation.”
He said he’ll will respond with “particularity to every issue raised today by Herbalife.”
Pershing Square has been contacted by “numerous interested parties who have provided additional insight in into Herbalife’s business practices,” Ackman said.
Herbalife also talks up earnings
While Herbalife spent much of the morning meeting focusing on its business model and refuting “misrepresentations” by Ackman, officials also said the company expects to meet or exceed its fourth-quarter forecast.
It’s also considering moves to buy back more stock.
Even with the loss, the stock remains well above its recent closing low of $26.06 on Christmas Eve, four days after Ackman launched his attack. Before Ackman’s move, the stock was trading in the low $40s.
Ackman has disclosed a massive short position, essentially a $1 billion bet that the stock will fall. In his presentation, Ackman said Herbalife relies on recruitment of new participants rather than sales of products to generate profits.
His conclusion was rejected by another hedge fund titan, Dan Loeb of Third Point, who disclosed a holding in the company of nearly 9 million shares on Wednesday and said in a letter to clients that Herbalife stock could be worth $55-$68 a share. Loeb declined to comment on Thursday’s developments, according to a spokesperson for Third Point.
See a slide show of hedge fund heavyweights Ackman, Loeb battling over Herbalife.
Meanwhile, the New York Post reported that activist investor Carl Icahn has also taken a stake in Herbalife.
Comparisons to GNC
In the midst of this fervor over Herbalife, executives at the firm said the company makes legitimate products and that its sales system isn't a pyramid scheme. See copy of Herbalife presentation slides.
Chief Operating Officer Rich Goudis said Herbalife research and development spending is comparable or more than related firms such as GNC and that it is investing to boost in-house manufacturing of its products.
President Des Walsh focused on an independent study of Herbalife by Lieberman Research Worldwide that concluded that millions of Americans are familiar with its nutritional products.
Walsh said the company adheres to Federal Trade Commission rules requiring that the vast majority of purchases are motivated by resale or consumption, not rewards.
Walsh attacked Ackman’s claim of “pop and drop” business of relying too heavily on new markets for sales, and says 92% of growth is in markets 10 years or older.
Chief Financial Officer John DeSimone said a representative of Ackman’s firm, Pershing Square, approached him at a past investor meeting. DeSimone encouraged him to tell his boss to call the company directly to get information, but no call was ever made.
“We’re completely confident in our financial presentations,” DeSimone said.
Ackman, “is trying to bolster a fictitious argument that every dollar we pay to a distributor is a recruiting reward,” DeSimone said. “It is a clear misrepresentation.”
Kellogg view: Not a ‘scintilla of evidence’
Also during the presentation, Anne Coughlan of the Kellogg School of Management, Northwestern University, said Herbalife’s direct-selling method, known as multi-level-marketing, is comparable to programs by Avon Products Inc. (NYSE:AVP) , Amway, Mary Kay or Tupperware.
“I didn’t even see a scintilla of evidence that this company is running anything other than a legitimate multilevel marketing” business, Coughlan said.
During a question period, one analysts asked CEO Johnson if he’s considering taking the company private.
“We like being public for a lot of reasons. Don’t ask me about them right now,” Johnson said.
Johnson also said Herbalife is looking at any means available to protect the company, but didn't comment further. His statement came in response to a question about the potential for a lawsuit against Ackman.
Johnson said the controversy over his company on Wall Street hasn’t affected the company’s sales network.
“Our distributors are stronger than ever,” Johnson said. “There’s doubts being raised by an individual who has an economic interest in our company not performing.”
Walsh said a video segment aired by CNBC-TV featuring a disgruntled distributor amounts to a “distortion” and said he expects more negative stories to be “dragged out.”
