Pershing's Ackman Moves to Soften Risk on Herbalife Pyramid Bet

Thursday, 03 Oct 2013 08:59 AM

 

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Billionaire hedge fund manager Bill Ackman told his investors that he has reduced the risk on a bet that Herbalife Ltd. will collapse as an illegal pyramid scheme.

In a letter to Pershing Square Capital Management LP’s investors, Ackman said he had modified his Herbalife equity short position, worth about $1.5 billion, by converting 40 percent to long-term put options. Herbalife is the focus of a battle between Ackman and Carl Icahn, who has taken a 16 percent stake. Herbalife has repeatedly denied the allegations.

“The restructuring of the position preserves our opportunity for profit,” wrote Ackman, who confirmed the letter that was first reported by the New York Post. “If the Company fails within a reasonable time frame we will make a similar amount of profit as if we had maintained the entire initial short position — while mitigating the risk of further substantial mark-to-market losses — because our exposure on the put options is limited to the total premium paid.”

The Cayman Islands-based company’s share price has more than doubled this year. Ackman’s move reduces the equity short position held by Pershing to 12 percent from 16 percent of the firm’s $10.8 billion portfolio, Ackman told investors.

“Since our presentation on Herbalife at the end of last year, we have not learned any facts that are inconsistent with our belief that the Company is a pyramid scheme that engages in unlawful and deceptive marketing practices,” Ackman also wrote. “In fact, there have been a number of materially positive developments that increase the likelihood of regulatory intervention and the Company’s closure.”

Bond Speculation

Ackman said Herbalife’s recent share gain has been prompted by speculation that the company will initiate a $2 billion investment grade bond issue at an interest rate of 4 percent and use the proceeds to repurchase stock at $75 a share. Ackman said he remains skeptical.

“Irrespective of whatever spin Ackman tries to put on this display of legerdemain, the man just screamed the first syllable in ‘Uncle’,” Robert Chapman, founder of hedge fund Chapman Capital LLC, who has been critical of Ackman’s Herbalife allegations, said in an e-mail. “The synthetic option straddle he just bought from the now-short counterparties must have cost his investors an arm, leg and torso.”

Ackman has accused Herbalife of swindling unsophisticated consumers with false get-rich promises using overpriced products that hide a pyramid scheme. He has urged U.S. regulators, elected officials and community activists to help shut it down.

Operators of pyramid schemes typically seek to make money by recruiting new members who pay fees to existing members rather than relying on just the sale of goods and services. The Federal Trade Commission has said modern pyramid schemes can use products to hide their true intent.

Ackman declined to comment beyond the letter.


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