Photographer: Patrick T. Fallon/Bloomberg

Herbalife Soars After Saying It's Close to FTC Resolution

  • Company estimates $200 million payment in potential settlement
  • FTC investigation still could lead to lawsuit, Herbalife says

Herbalife Ltd. soared as much as 13 percent in early trading after saying it’s in late-stage talks to resolve a Federal Trade Commission probe into whether the nutrition company is a pyramid scheme.

If Herbalife settles with the agency, the company expects to pay about $200 million, according to a statement Thursday. The move would end a more than two-year investigation that followed a short-selling campaign by billionaire hedge fund manager Bill Ackman.

“While there are a number of open issues, those discussions have progressed to an advanced stage and the range of outcomes now includes litigation or settlement,” the company said in a statement. “If a settlement is reached with the FTC, it would likely include injunctive and other relief as well as a monetary payment with our best estimate of a payment being $200 million.”

The remarks followed the company’s first-quarter report, which included better-than-expected results and an increased forecast. Excluding some items, earnings were $1.36 a share last quarter, the Los Angeles-based company said. Analysts had projected $1.09, the average of three estimates compiled by Bloomberg. Sales amounted to $1.12 billion, topping the average projection of $1.07 billion.

Ackman’s Campaign

The latest results signal that Herbalife is weathering Ackman’s attacks from and the overhang from the FTC investigation. Ackman, who placed a $1 billion bet against Herbalife’s stock in 2012, has crusaded to persuade regulators and investors that it’s an illegal operation. In March 2014, the FTC began probing the marketing practices of Herbalife, which relies on independent distributors to sell weight-loss shakes and supplements.

The shares rose as high as $66.05 in early trading the day after the remarks. The stock had gained 8.8 percent this year through Thursday’s close, helped by investor optimism about an FTC resolution.

Herbalife also gave a rosier outlook for this year’s profit. It now expects earnings of $4.40 to $4.75 a share. The company had previously forecast $4.05 to $4.50 a share. It also said sales would grow as much as 4.5 percent, an increase from earlier guidance of up to 2.5 percent.

Reviving Growth

Herbalife has been coping with the dual challenges of boosting growth while warding off Ackman’s criticism. From 2011 to 2013, sales rose an average of about 21 percent a year. Revenue advanced just 2.8 percent in 2014, and it fell 9.9 percent last year.

In February, Herbalife had said it was in discussions with the FTC on a “potential resolution” of the investigation, which boosted the stock.

In a filing Thursday, the company elaborated on its FTC negotiations, saying it’s difficult to predict the timing of a potential resolution and the likely outcome. It also said that if discussions don’t progress, a lawsuit would be likely.

In cases like the Herbalife investigation, the FTC often seeks to impose changes to a company’s practices -- known as injunctive relief -- in order to stop misconduct that it sees as harming consumers.

“Injunctive relief can be just as significant as the money obtained for consumers and even more influential on a company’s future operations,” Justin Cole, a spokesman for the FTC, said in a statement. He declined to comment further on the negotiations with Herbalife.

FTC Test

The dispute boils down to whether there is legitimate demand for Herbalife’s products by actual consumers, which is the FTC’s test for a pyramid scheme. Ackman says there isn’t. He contends that revenue is driven by people lured into the business opportunity of being Herbalife distributors. They buy its vitamins and other goods to meet sales goals that very few ever achieve, Ackman says. Herbalife has aggressively denied these allegations.

“I believe it is a certainty that this company is a pyramid scheme,” Ackman said on Bloomberg Television in December 2012, shortly after delivering a more than three-hour presentation on Herbalife. “This is the highest conviction I’ve ever had about any investment I’ve ever made.”

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