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Herbalife Said to Consider Reinstating Buybacks After FTC Probe

Updated on
  • Company suspended share repurchases during investigation
  • Tactic could squeeze Bill Ackman, who has bet against stock

Herbalife Ltd. is considering bringing back stock purchases after this month’s settlement with U.S. regulators, according to a person familiar with the situation, a move that could be used to squeeze short-selling nemesis Bill Ackman.

The repurchases are part of a range of options under consideration, said the person, who asked not to be identified because the deliberations aren’t public. Herbalife hasn’t announced any new buybacks since 2014, when the nutrition company increased its repurchase program to $1.5 billion. At the time, Herbalife suspended its dividend and sold convertible bonds to help fund the effort.

Buybacks could be used as a weapon against Ackman, the hedge fund manager who made a $1 billion bet against Herbalife more than three years ago and accused it of being an illegal pyramid scheme. His crusade led to an investigation by the U.S. Federal Trade Commission, which settled with Herbalife on July 15. Though the resolution included a $200 million payment and changes to Herbalife’s U.S. business, the agency stopped short of calling it a pyramid scheme.

Credit Agreement

Herbalife put stock repurchases on hold last year after lenders became concerned about the FTC probe and placed restrictions on the company in a renewed a credit agreement. Now that the investigation is over, the company has been mulling how to deploy its resources.

“From 2007 to 2014, we utilized approximately $3.7 billion for share repurchase and dividends,” Herbalife Chief Financial Officer John Desimone said in an e-mailed statement. “Moving forward, cash management and capital structure are an important part of our strategy and all options are being considered.”

Desimone didn’t elaborate on what form the strategy may take. Pershing Square Capital Management, Ackman’s hedge fund, declined to comment.

Herbalife rose as much as 2.5 percent to $68.65 on Friday. Through Thursday’s close, the shares had gained 13 percent since the settlement with the FTC was announced.

Buybacks are considered a form of returning cash to shareholders because they reduce the amount of stock on the market, potentially making each share more valuable. That could hurt a short seller like Ackman, who has bet that the share price will decline.

Restoring the repurchases also would reassure investors that the company can bounce back from the FTC probe, said Tim Ramey, an analyst at Pivotal Research Group.

Confidence Boost

“It would be a confidence message for sure,” said Ramey, who defended the company during Ackman’s campaign. Herbalife has always planned to get the buyback restrictions lifted, he said.

The company made $1.29 billion in purchases in 2014, more than double the cash its operations generated. Herbalife’s current buyback authorization only has about $232 million remaining. It may also have to borrow more. The company had $774.2 million in cash at the end of March.

The company has yet to give specifics on how the FTC agreement will affect its business in the U.S., which accounts for about 20 percent of its revenue. Ackman has said the changes will eventually cause it to collapse.

Herbalife created an oversight committee of the board for implementation of the settlement. It also named Jonathan Leibowitz, a former FTC chairman, as a senior adviser to the board. More details are likely to come when the company reports its second-quarter results after the market closes on Aug. 3.