Yesterday I posted a note contemplating the motives behind Carl Icahn's 13% Herbalife (HLF) stake. Was it a great event-driven investment opportunity created by Bill Ackman's short bear raid? Or was it payback time for a judgement the younger hedge funder had just clawed from Icahn on a decade-old dispute?
As both sides of this contemplation have numerous supporters, I suggested that short of reading Icahn's mind (or his diary, if we were so lucky for him to keep one), we would not be able to know.
I do have more clarity into what I found intriguing in the timeline of Icahn's Herbalife buy-in, as well as why 11.5% of his 13% stake is in options rather than physical shares.
The fact that Icahn Herbalife buy-in took a month-long break after December 24th, was likely not because he had had his fill, as I put it. Similarly, his purchase resumption on January 28, which was the Monday following his Friday clash with Ackman on TV, was likely not fueled by a newfound desire to "stick it" to Ackman.
Matt Levine of Dealbreaker details something called the HSR Antitrust Act, which stipulates that an investor amassing a position in any one stock of more than $68.2 million, needs to file for permission with the FTC. It is a process that takes the thereabouts of a month to get through. As I noted on my previous post, Icahn had already snapped up close to $53 million in shares by December 24th. By the time he starts buying up the rest of his stake, he has presumably acquired some sort of permission to do so by the respective authorities.
Why options? As I noted, Icahn's stake for the time being is of a synthetic nature: long calls and offsetting short puts of May 2013 $23.50 and January 2015 $26 options. Other than cheaper financing, this is exactly as Icahn having bought shares, so his option stake does not give him any right without the related obligation to buy or sell the shares. Should things go sour for him (i.e. shares falling below $26 and $23.50 in their respective expirations), Icahn's loss would equal exercise price minus market share price at time of expiration plus premium charged for short puts minus premium paid for long calls.
Icahn started building the position synthetically while he gets permission from the FTC to take delivery of physical shares. He said as much on Friday's CNBC interview -- this time, sans Ackman as costar -- where he hinted he had gained clearance for a physical stake.
This last tidbit of information (1) removes any presumption that Icahn's commitment to this trade is casual in nature and (2) suggests that any motivation he has to screw with Ackman did not lead him to a rash decision, but a deliberate and carefully executed plan. Screw with Ackman he may very well want to, but he has taken his sweet time with it, and did not simply allow himself to be incensed on live television. The screw had been in place, period.
It should be noted that the hurdles Icahn has had to jump through to establish his stake apply when it comes to him divesting himself of Herbalife. On this, here is another fascinating piece by Matt Levine. In short, he has to wait a while.
Rest assured, we have not heard the last of act of this piece of theater. Icahn and Ackman will intermittently share the stake with the likes of Daniel Loeb, who was reported to have divested at least a significant portion of his 8% HLF stake, and David Einhorn, who despite not having disclosed any type of a stake on the stock, keeps being [involuntarily?] involved by the media.
An Herbalife player with a particularly astute grasp of the situation has been Robert Chapman of Chapman Capital. Of the whole bunch, he may be the one guy who actually knows more about Herbalife than the rest combined. He may have been the original activist shareholder of the company over a decade ago. Having bought shares at the post-Ackman bottom, he exited his position at the height of Icahn's 13-D tidal wave on Friday morning, likely netting him a near-three-digit percent gain. Of the ongoing debate he says that while Icahn appears to be winning, Ackman should not be counted out. In fact, he believes Ackman's upcoming salvo in the saga will create new opportunities for Herbalife bulls to enter again at much lower prices than currently available. Ackman's salvo, by the way, may come through enticing one or more of many regulators in the United States with any sort of jurisdiction over Herbalife to start some type of action against the company.
In the meantime, the main Herbalife player may well continue to be Carl Icahn himself. As we have had barely one trading session since his 13-D filing came forward, what is to say he did not continue building his stake up on Friday, February 15? What is to say he will not continue to buy shares at the same clip on Tuesday, February 19 and onward? Icahn's next public move may, thus, be the unveiling of a Herbalife stake that has ballooned to 20% or even above. All he needs is to sit tight until regulators approve the size of the stake. Needless to say, as well, his options barely start at the open market. His conversations with the company regarding strategic options may have already initiated.
Bill Ackman is not done hurting. But in the meantime, as Robert Chapman has put it, watch for "the guy who just got punched."