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In an article I wrote a few weeks ago I highlighted the specific provisions in Mr. Icahn's standstill agreement with Herbalife (HLF).

It would appear that as of Monday's close, these restrictions no longer apply. Ostensibly, Mr. Icahn is now a free agent.

1) Herbalife issued a statement a few days ago to Bloomberg that Mr. Icahn has no plans to go anywhere.

2) Mr. Ramey suggested that Mr. Icahn may not be able to trade his shares anyway if he is privy to inside information. Who knows? Mr. Ramey has been wrong before.

On a mark-to market basis, Mr. Icahn has an enormous profit. Ideally, for longs, the stock will trade higher if and when Herbalife releases audited financials and/or recapitalizes the company.

I am not convinced a recapitalization is in the best interests of long-term shareholders.

1) The valuation of the repurchases will likely prove to be dilutive over time.

2) The levered balance sheet introduces additional risk that should likely be met with a higher risk premium for HLF common.

Remember, Herbalife's free cashflow is only as perpetual as its ability to recruit new members each and every year.

This begs the question, what is Mr. Icahn's exit strategy?

It would seem Mr. Icahn now has a number of options available to him today that he didn't have yesterday that might include the following:

1) Stay the Course - if Mr. Icahn really loves the HLF business model (why he would escapes me) he could stay in and allow his equity position to compound.

2) Sell Call Options - Mr. Icahn could take advantage of Herbalife's high implied volatility on its options and sell Covered Calls as a way to exit his position if and when HLF common trades higher.

3) Sell into an HLF Share buyback - if HLF borrows money to buyback stock, Mr. Icahn could sell some or all of his shares back to the HLF treasury as the float is reduced.

4) Hedge his long position. If Mr. Icahn is an event trader, he could hedge his long position with put options over the next 60-90 days. This would offer insurance if there is any fear that the SEC may, in fact, intervene while offering upside exposure if a clean audit is imminent.

5) Take HLF private. This is always an option, I suppose, though I am not sure why Mr. Icahn would want to own HLF as a long position indefinitely.

Q. If you were in Mr. Icahn's shoes, what would you do?

There is nothing left to prove to Mr. Ackman. Mr. Icahn could leave his position a victor both financially and reputationally.

If HLF's recruiting machinery stalls out, the common stock could quickly reverse course. QoQ results have been sequentially flat. This may be more ominous than not.

There seems to be an assumption that the announcement of a share repurchase will automatically lead to an increase in the price of HLF common or a short squeeze. Is this a slam dunk? Or, might the buyback be the cause celebrate that will lead long investors to liquidate their holdings leaving the Herbalife treasury holding the proverbial bag?

Mr. Icahn has executed a brilliant trade in HLF. He should be given credit for his opportunism. How much longer he continues to ride the HLF train remains to be seen.

Until today, his ongoing participation could be counted on. Now, investors must consider an additional variable in the analysis of Herbalife.

Namely, what is its largest single investor likely to do going forward?

One way or another, Mr. Icahn will ultimately monetize his gain. Right now there is a healthy bid underneath the HLF ticker symbol. How long that bid remains is anyone's guess. Threats include:

  • regulatory intervention
  • deteriorating recruiting trends
  • other Hedge Funds beating Icahn to the exit
  • Ackman covering his short
  • a newly levered balance sheet taken, ironically, as a sell signal

Finally, how silly would it look to find that one day you are up over 100% on your money and the next you are taken out behind the woodshed for a surprise outcome.

Q. What would you do in the same position?

I guess we will all find out soon enough. As of Monday's close, Mr. Icahn is unlocked.

Source: Icahn Unlocked: Now What?