Herbalife Ltd.’s shares logged their biggest-ever gain, rising more than 25 percent after hedge-fund manager Bill Ackman failed to convince investors that the seller of weight-loss shakes is committing fraud.
Speaking during what he’s billed as the most important presentation of his career, Ackman focused on the company’s nutrition clubs -- a central piece of the Herbalife direct-selling model. Ackman said he estimates that the distributor-owned clubs lose $12,000 each per year, on average.
He’s also calculated that unpaid, recruited trainees are bilked out of more than $3,000 they and their friends and family must spend on shakes to qualify to open such a club.
“I don’t think they can show it’s a legitimate business on the nutrition club side,” Ackman said. “We’re pushing back pretty hard against the tide, and once the tide starts going in the other direction, this thing implodes incredibly quickly.”
With an initial $1 billion bet against the company, Ackman’s Pershing Square Capital Management LP is trying to profit from a drop in Herbalife’s share price. As part of a $50 million two-year campaign to shut down the nutrition company, Pershing investigated 240 of the company’s clubs in several countries, Ackman said today.
“Bill Ackman’s claim about the earnings of Herbalife nutrition clubs is completely false and fabricated,” the company said in response to his presentation. “Once again, Bill Ackman has over-promised and under-delivered on his $1 billion bet against our company.”
Herbalife also released an analysis arguing that it’s not a pyramid scheme as Ackman asserts. According to research by Walter H. A. Vandaele, an economist at Navigant Economics LLC, 97 percent of Herbalife’s products are purchased for end-use consumption, the company said.
Over more than three hours, Ackman detailed the findings of a Pershing Square-funded investigation, claiming that the company targets the poorest to build their own costly clubs through mandatory training programs and restocking. The model forces would-be distributors to consume the products at their own cost, Ackman alleged.
“By becoming legal, they die,” he said of the nutrition clubs. “Why? Because we don’t think there’s fundamental demand for the product.”
Ackman, who yesterday compared Herbalife to Enron Corp. in television appearances, today likened the company to a mafia operation, and -- asked about gains in Herbalife shares during the presentation -- suggested that the company was using its buyback authority to lift the price, saying it “can only prop up the stock for so long.”
The shares rose 25.5 percent to $67.77 in New York trading, their biggest single-day gain. Herbalife has gained almost 60 percent since December 18, 2012, the day before the first reports of his short position.
In a Feb. 13 presentation, Ackman said that Herbalife was the biggest loser for Pershing Square since its inception.
Ackman is tarnishing his repuation by presenting weak evidence after making strong claims, Erik Gordon, a professor at the University of Michigan’s Ross School of Business, wrote in an e-mail today.
“Less hyperbole might make for more credibility,” Gordon wrote. “He has gone from helping his case to hurting it.”
Pershing Square’s campaign has included lobbying regulators to close Herbalife, and Ackman has restructured his initial short against the company with options, details of which he has declined to disclose. He reiterated today he would personally pursue the company “to the end of the earth,” while also saying he would not risk his investors’ money indefinitely.
The bet against Herbalife has pit Ackman against Billionaire investor Carl Icahn, the Los Angeles company’s largest shareholder with a 17 percent stake at the end of March, data compiled by Bloomberg show. Icahn didn’t immediately reply to a request for comment.
Pershing Square accuses Herbalife of misleading distributors, misrepresenting sales figures and selling a commodity product at inflated prices. Regulators including the U.S. Federal Trade Commission and law enforcement are investigating the allegations. Ackman said on Bloomberg Television yesterday that his firm will turn over the findings detailed today to regulators.
“The FTC inquiry will actually be something that puts this behind us,” Herbalife Chief Financial Officer John Desimone said in an interview with CNBC ahead of Ackman’s presentation. “This has been 18 months of always the bark is worse than the bite.”