2nd UPDATE: Pershing Square's Ackman Details Case for Shorting Herbalife

Date : 12/20/2012 @ 6:27PM
Source : Dow Jones News
Stock : Herbalife Ltd. (HLF)
Quote : 75.33  -2.25 (-2.90%) @ 12:06AM
Herbalife share price Chart

2nd UPDATE: Pershing Square's Ackman Details Case for Shorting Herbalife

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--Calls nutritional supplement maker a "pyramid scheme"

--Ackman's Herbalife share-price target: "Zero"

--Herbalife asked to be invited to Ackman presentation, but wasn't

(Adds new statement from Herbalife, in seventh paragraph)

   By Liz Moyer and Juliet Chung 

Pershing Square Capital Management LP's William Ackman took to a New York City stage on Thursday to press his case for selling short the stock of Herbalife Ltd. (HLF), a nutritional supplement maker he calls a pyramid scheme.

Shares of Herbalife, already battered this year after rival hedge-fund manager David Einhorn peppered the company with questions on its May earnings conference call, tumbled further on word of Mr. Ackman's position. They dropped nearly 10% on Thursday, to $33.70, after falling 12% on Wednesday.

Flanked by one of Pershing's analysts and one of its lawyers, Mr. Ackman spent more than three hours stating his case from an auditorium in midtown Manhattan. He said Herbalife's distributors--or salespeople--make more money by recruiting other distributors than selling the company's diet and nutritional products. That, he said, is a key clue that the company is a pyramid scheme.

Pershing Square analyst Shane Dinneen, who spent one year delving into Herbalife's books, explained the company's complicated system of recruitment and financial rewards and incentives. Since its founding in 1980, Mr. Ackman said, some 1.9 million sales people have failed to make any money selling Herbalife products, costing them roughly $2,000 each in the process for supplies, training and sales leads, for a total net loss of $3.8 billion over that time.

Mr. Ackman also said Herbalife inflates its retail sales by setting the suggested retail price of its products--which he called commodities--multiples higher than those sold by competitors.

In a statement late Thursday afternoon, a Herbalife spokeswoman said, "Today's presentation was a malicious attack on our business model based largely on outdated, distorted and inaccurate information. We operate at the highest ethical and quality standards, and our management and our board are constantly reviewing our business practices and products. We also hire independent, outside experts to ensure our operations are in full compliance with laws and regulations. We are not an illegal pyramid scheme."

Herbalife Chief Executive Michael Johnson had forcefully defended his firm on CNBC on Wednesday, as word of Mr. Ackman's planned presentation leaked out ahead of the formal event. Mr. Johnson said Mr. Ackman's claims were an attempt to manipulate Herbalife stock.

In a video presentation on the company's website on Thursday, Mr. Johnson continued his defense against short sellers. "Our goals are so much bigger than the empty accusations coming from a few opportunists."

Earlier on Thursday, the Herbalife spokeswoman said in an emailed statement that the firm had requested to be present at Mr. Ackman's meeting but was denied that request. "Now we know why. Had our executives been there, they would have been able to tear Mr. Ackman's premises and interpretation of our business model apart. His misstatements and mistakes are too numerous to address immediately," the spokeswoman said.

Though Mr. Einhorn questioned Herbalife executives in May, it isn't publicly known what, if any, position he has taken in the firm's shares. During a question and answer session at Thursday's presentation, representatives of Pershing Square said they hadn't spoken with Mr. Einhorn about Herbalife.

A spokesman for Mr. Einhorn's fund declined to comment.

Both hedge fund managers are known for demanding answers from public companies. The 46-year-old Mr. Ackman also has sizeable stakes in Procter & Gamble Co. (PG) and J.C. Penney Co. Inc. (JCP) through his firm. One of his more famous negative calls was in 2007, at a conference sponsored by the Ira Sohn Conference Foundation, where he launched a searing critique of bond insurer MBIA Inc.

Thursday's presentation was also sponsored by the Ira Sohn organization. The slideshow was titled "Who wants to be a millionaire?" and contained excerpts from securities filings, photographs of locations where Herbalife products are sold taken by a Pershing Square employee, and several video clips, including Mr. Johnson's appearance on CNBC on Wednesday.

Mr. Ackman said he is short Herbalife shares but has no positions in options on Herbalife stock. He wouldn't elaborate on the size of his short position except to call it "enormous."

He also said all of the proceeds would go to charity. Short sellers borrow shares and sell them, hoping to profit by replacing them later at a lower price.

Mr. Ackman challenged regulators to look into his short position in Herbalife shares, as well as into Herbalife's books. He noted Mr. Johnson has sold $140 million of company stock since 2007. A spokeswoman for Herbalife wasn't immediately available to comment on this assertion by Mr. Ackman.

Herbalife has countered some accusations raised by short sellers, including the idea that the products aren't widely sold at retail and the crux of the firm's business model is recruiting more distributors. Herbalife says the vast majority of its customers are outside the company's distributor organization. Citing a study, it says 92% of 5.5 million U.S. households are customers who purchased products for consumption and aren't Herbalife distributors.

Asked during the presentation what his target price was for Herbalife shares, Mr. Ackman said, "Our target price is zero because we think the business will fail."

Write to Liz Moyer at liz.moyer@dowjones.com

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