Could Chinese Regulators Make Bill Ackman Richer?

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange.
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Dealing with regulators can be a challenge for any business. It's especially true for companies that might be declared lawbreakers at any time.

So it's no surprise that shares of Nu Skin Enterprises Inc. have plummeted about 37 percent since the Chinese government said that it would investigate the personal-care company on the grounds that it might be an illegal pyramid scheme. The probe comes a day after the publication of a report on the company in the People's Daily, the official newspaper of the Communist Party of China.

What's bad for Nu Skin could be good for Bill Ackman, the hedge-fund manager who has spent more than a year attempting to profit from his bet that Herbalife Ltd., which makes and sells dietary supplements, also is a pyramid scheme and would get shut by regulators. Ackman's investment has cost him hundreds of millions of dollars so far. He also suffered a significant setback in December, when a Belgian court rejected claims that the firm's reliance on multilevel marketing made it a pyramid scheme. The latest news, however, has caused Herbalife shares to fall about 10 percent. (Usana Health Sciences Inc., which seems to be in a similar business, also lost about 10 percent as a result of the Chinese announcement.)

Ackman and his investors may want to hold off on the celebrations. Chinese regulations prevent Herbalife from engaging in some of its normal business practices. Partly as a result, the country accounts for only about a tenth of Herbalife's sales, according to the company's most recent quarterly filings. That makes the recent drop in Herbalife's share price look overdone. (On the other hand, China is the company's fastest growing geographic segment by sales.) Even if the Chinese government decided to expel the company, Herbalife's limited exposure ought to put a floor under its stock price -- unless other regulators decide to follow China's lead. That's a possibility, though it seems like a long shot.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.