Ackman Maintains Bet Against Herbalife After FTC Settlement

Why Ackman Plans to Maintain Bet Against Herbalife
  • Investor will use FTC complaint to draw overseas regulators
  • Nutrition company settled with agency for $200 million

Billionaire hedge fund manager Bill Ackman plans to maintain his bet against shares of Herbalife Ltd. and push regulators outside of the U.S. to investigate the nutrition company, extending a nearly four-year battle.

Herbalife’s settlement with U.S. Federal Trade Commission last week -- instead of ending the investor’s campaign against the seller of weight-loss shakes -- has given the effort new life, Ackman said on a call with investors to discuss results of his firm, Pershing Square Capital Management. The strategy going forward will include using the FTC’s complaint, which laid out findings similar to Ackman’s allegations, to drum up interest from regulators in other countries. Ackman predicted it was only a matter of time before the changes brought by the FTC settlement will cause Herbalife’s demise.

“Herbalife has been shut down by the FTC -- it just doesn’t know it yet,” Ackman said on the call.

Ackman and Pershing Square have spent more than three years trying to bring down Herbalife, which sells its products using a multi-level marketing system, by alleging that it’s a global pyramid scheme that preys on the poor. So far, the Herbalife campaign has been a bad one for Ackman’s investors. Pershing Square started betting against the stock when it was in the high $40 range, and it closed at $64.58 on Tuesday. The shares rose even further on Wednesday, climbing as much as 1.3 percent.

“After more than two years of working with the FTC, I think we understand the terms of the settlement agreement very well,” Alan Hoffman, Herbalife’s executive vice president of global corporate affairs, said in a statement. “We would not have settled unless we had the greatest confidence in our ability to comply with the agreement and grow our business.”

While the FTC didn’t weigh in on whether Herbalife is a pyramid scheme, its complaint against the company included allegations that it deceived recruits and had a compensation structure that enriched few while the majority or participants made no money. The agency ordered changes to fix those problems and required Herbalife to pay $200 million to compensate victims.

‘Factually Incorrect’

Herbalife said on Friday that it “believed many of the allegations made by the FTC are factually incorrect,” but that the settlement was a way for the company to move forward and avoid the cost and distraction of litigation.

While some investors and analysts saw the settlement as the end of the battle, Ackman saw it as the beginning of a new phase. He reacted to the deal on Friday by saying that the changes Herbalife has been ordered to make will cause the company to “collapse.”

Ackman has repeatedly said that Herbalife’s $4 billion in revenue isn’t driven by demand for its products. Instead, he says, the company makes money selling an unrealistic business opportunity. Distributors buy thousands of dollars of products from Herbalife to meet sales thresholds in an attempt to make it in the business. Ackman says the system doesn’t work because there’s little or no real demand from consumers, so distributors either recruit others or fail and lose money.

Similar Conclusions

The FTC came to similar conclusions after a two-year investigation, resulting in the push for the company to change how U.S. distributors are paid. The FTC settlement will require that U.S. distributors’ compensation will be based on verified retail sales receipts that includes customers’ names, payment methods and quantities sold.

The company said it has already developed a mobile application in the U.S. to make that an easy process. An independent auditor will oversee the collection of the data and all the changes brought by the settlement for the next seven years and report back to the FTC.

The settlement with the FTC only covered the U.S., which accounts for about 20 percent of Herbalife’s total revenue. Herbalife highlighted this fact in its statement on the settlement. But the FTC confirmed that it shares information and works with overseas counterparts on similar areas of interest.

“It’s one thing when a short seller goes to a regulator, but it’s very different when the principal regulator of Herbalife makes these conclusions,” Ackman said. “That makes it easier for foreign regulators to take action.”

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