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Introduction

As most everyone knows, in December 2012, Bill Ackman (Founder of Pershing Square) dramatically, and in a "Don Quixote" like fashion, announced that Herbalife (NYSE:HLF) was a scam, a pyramid scheme, and that it should be put out of business. He literally called upon regulators to rid the planet of the evil HLF business scheme. Not surprisingly, he also announced that Pershing was short some 20,000,000 shares of HLF stock, and he expected it to go to zero. His self-serving antics really makes one wonder who regulators should be looking at...HLF or Ackman.

Ackman excoriated the HLF business plan which has successfully worked for decades, throughout the world. I found Ackman's bravado so pathetic, incongruent and irritating, that I wrote an article about the unfolding story which was published by Seeking Alpha in mid January.

Now, the suspense of this high stakes game has jumped geometrically with the entry of Carl Icahn into the fray. In his filing with the SEC, the renown corporate raider and tycoon suggested the prospects of a recapitalization or a going-private transaction. HLF shareholders should be delighted. Ackman should be horrified.

The Icahn Announcement

While the HLF story and Ackman's short position have remained in the news, Friday's announcement by Carl Icahn was explosive. The news, of course, was that Icahn acquired 14 million shares of HLF which represents about 13% of the Company. Known for his corporate activism, the tough-talking Icahn represents a major threat to Ackman's position, and could be a boon for HLF shareholders. Shortly after the announcement became public, shares of HLF jumped 10 points in the afterhours market, exemplifying the power Icahn wields in the eyes of investors.

Icahn's SEC Filing

Investors in Pershing and Bill Ackman, in particular should find Icahn's actions chilling. Specifically, the suggestion of "recapitalization" or a going-private transaction would likely push the stock price well above its current levels. Following is an excerpt from Icahn's SEC filing:

The Reporting Persons have conducted significant analysis with respect to the Issuer. The Reporting Persons have concluded that the Company has a legitimate business model, with favorable long-term opportunities for growth. The Reporting Persons intend to have discussions with management of the Issuer regarding the business and strategic alternatives to enhance shareholder value, such as a recapitalization or a going-private transaction.

Adding Fuel to The Fire - The Icahn / Ackman Animosity

Although Icahn claimed today that his actions with HLF were purely business, and he was taking advantage of an undervalued stock opportunity, the animosity between Icahn and Ackman is well known and goes back many years. For example, last month, Ackman and Icahn hurled insults at one another during a dual appearance on CNBC to discuss Ackman's HLF trade. Icahn branded Ackman a "liar," a "major loser" and a "cry baby"; Ackman called Icahn a "bully" who "takes advantage of people." While it's unlikely that Icahn's dislike of Ackman was the primary motivating factor to take the long position in HLF, it surely gives him an additional incentive to win the battle.

Ackman's Bet: Winning is Contingent Upon Regulatory Intervention

In my view, Ackman has offered platitudes, not proof of a failing company to justify his short position in HLF. His major premise is 100% dependent upon regulators putting HLF out of business.

We know that HLF has been in business 32 years. The suggestion of a 32 year FTC "coma" is simply absurd. The applicable statutory regulations are quite clear, they haven't changed much over the years, and HLF has always maintained cadres of lawyers from the most powerful law firms to make certain that the Company was in compliance with all regulations.

The Short Squeeze

Based upon Mr. Ackman's public comments that Pershing is short more than 20 million shares, it would appear that Pershing's position is more than 80% of the market's entire short. In addition to the Icahn intervention, investors should also consider the following:

√ On 1/17/2013 HLF Announced results for 4th Quarter were Above Expectations

√ HLF Announced it will commence it's Share Buy-Back Program of 428 Million Shares

√ Considering the present short interest, it will become increasingly more difficult to find HLF shares to short.

√ Dan Loeb who runs the $4.5 Billion Third Point LLC Fund announced that's he's going Long HLF. Commenting on this news, Jim Cramer stated: "Loeb is going to crush Ackman."

Fundamentally Strong Metrics


MetricFactor/Number
Closing Price 2/15/2013$38.74
P/E Ratio10.44
2012 Dividend Per Share$1.20
Next Ex-Dividend DateNot Announced
Effective Yield (Based On 2012)3.09%
52-Week High$73.00
52-Week Low$24.24
Beta1.15
5 Year Growth Rate25.30%
Current Year Est. EPS$4.64
Next Year Est. EPS$5.19
Compiled by Craig Van Pelt
SOURCE: Scottrade

Could HLF be Worth $103.93 In a Leveraged Buy-Out (Going Private) Transaction

HLF has gone through a "Going-Private" transaction before, and it's both interesting and valuable to compare that transaction to HLF's current metrics.

Specifically, in 2002 HLF was taken private by venture capitalist firms J.H. Whitney & Co., L.L.C. and Golden Gate Capital Inc. for approximately $685 million. Using "Net Income" as the valuation yardstick from the 2002 transaction, and applying it to HLF's 2013 metrics creates some really stunning numbers:

YearNet IncomeBuy-Out PriceP/E Ratio
2002$23,000,000$685,000,00029.78
2012$501,000,000$14,919,780,00029.78

Applying the 2002 Buy-Out P/E of 29.78 to HLF's Previous 12 Months EPS of $3.49 yields an effective price of $103.93 per share!

Obviously, there's little chance of history exactly repeating itself in terms of numbers. However, this kind of scenario (or anything close to it) would, indeed, be a home run for Icahn and HLF shareholders. For Ackman, it would be catastrophic, and he'd be the victim of one of the greatest and most deadly short squeezes in history.

Conclusion

Based on all of the foregoing, a short position in HLF is a VERY dangerous position to be in. I'm on board with Icahn since I believe Ackman is totally wrong. It's my view that the shares of HLF will continue higher and perhaps approach, or even exceed, its 52-week high of $73.00...or perhaps higher.

Icahn is a genius when it comes to developing creative transactions that will unlock shareholder value. When you add HLF's solid fundamentals, cash flow and growth rate to the scenario, it would appear that Ackman's bet is doomed. On the flip side, Icahn and HLF shareholders could potentially reap enormous gains.

Lastly, the HLF/Ackman/Icahn battle won't end soon. Icahn has enormous resources at his disposal to win the battle, and in my view, all of the legal facts, fundamentals and even public sentiment are in his corner. Icahn is using his own money so he's not obliged to answer to anyone. Ackman, on the other hand, must answer to his Pershing Square investors, and it's likely they're getting very nervous right about now. I'm guessing they'll surely begin to question Ackman's untenable position in the not too distant future. If Ackman has to start covering his shorts, there's no place for the stock to go but up.

I'm long HLF and I'll stay long until Icahn makes his final move.

Disclosure: I am long HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Herbalife: Icahn Cometh - Could The Stock Be Worth $103.93 Per Share?