Herbalife (NYSE:HLF) has been a storied short and a controversial long over the past year. First having started with a benign inquiry from esteemed short seller David Einhorn, the fabled debacle met its peak when Pershing Square's Bill Ackman presented a nearly 4-hour-long presentation on why HLF is a fraud during an Ira Sohn investing event. As of January 9th 2014, Bill Ackman and his investors have lost over ~600mm due to the stock's upward momentum of over 300% since his short positions (this is excluding the possibility that he hedged his melt-up risk by buying call options rumored to have been placed in Q4 2013). Since his publicized losses, Ackman has emotionally vested his career into making this investment his legacy, claiming he will take the "Herbalife bet to the end of the Earth."
In such a heightened battle for right and wrong, classes of highly-profiled investors have chosen their sides, and have made claims against each other's thesis. Having listened to both sides of the argument, I have concluded that neither are definitely conclusive - but amidst the process, I have discovered an important element to the story, the most telling of all in my opinion, that others in the press have overlooked or purposely avoid explicitly stating, which may or may not have been deliberately orchestrated by the larger media and broadcasting sector. What is this element? It is precisely the story of Herbalife CEO Michael Johnson and his intricate ties to Washington through his senior tenure at Walt Disney (NYSE:DIS). After having done some research, my core belief is that HLF is not a good short solely based on the fact that the CEO's ties to Washington are unbreakable, and for better or for worse by history, winning a battle against the omni-powerful house of Disney is equivalent to attacking the most powerful conglomerate of national interests of the United States.
The insuperable power of Michael Johnson via Disney
Michael Johnson was President of Walt Disney International since 2000, which is a position he held since succeeding current Disney President Bob Iger. This practically puts Johnson in the most elite of circles in the Disney club. One only needs to read the history of Disney to get a sense of its political power through the past centuries (WWII and on). During his career at Disney, Johnson expanded the company's media presence from less than 40 markets to more than 80 today, creating subsidiaries in Europe, Asia, Africa, Latin America, and the Middle East. Disney then quickly became the top home entertainment distribution organization with enhanced licensee operation controls under Johnson's global leadership. Having led such feats could only mean that he worked with lawmakers and regulators across the world for over a decade - in which one can only assume he developed powerful relationships to push his agenda. He was the highest paid CEO in 2011. He got more than $90mm, having exercised more than 2mm stock options in 2011 for a profit north of $70mm. In the process, he has made many of his constituents rich, tripling the company's stock over the years. Furthermore, Johnson is a former backer of failed Republican presidential candidate Rick Santorum. His presence in Washington therefore is irrefutably certain, and an extremely powerful one at that. In addition, Herbalife has spent $3.6mm on lobbying in the past five years, according to OpenSecrets.org. An even more fun (and scary) fact - if you take a look at the IPO prospectus filing of HLF on EDGAR filed on 1 October 2004 (linked here), there is a picture of the Obama family (when he was a Senator, 2004) being presented as model distributors! Search for "F-60" and you will see the family photo, including Obama himself playing on the beach with his children. (Author's note: It appears that this has been disputed as an urban myth according to links, but I will let the readers decide.)
Investing legends vs. Investing newbie
Now, don't get me wrong - Ackman is a very smart guy and I don't doubt his intellectual knack for security analysis. However, he is a relative newbie in consideration of the roster presented below, and I also believe that if I had to bet my money on whether Ackman would be as politically connected as the others to play out the heavily disputed thesis that involves regulatory overhaul, I would have to choose the long investor list. Below I present you the roster of longs and shorts to the best of my knowledge using public sources. It will be obvious that the two greatest financiers of our times, Icahn and Soros, are both against Ackman. These two investors are also very well looped into the political know-how of Washington through various activisms that anyone can research on their own from their past decades of success. In addition to Dan Loeb's public disclosure, one can find that Richard Perry and Kyle Bass are significant long investors as well, according to Hedgemony, which aggregates all hedge fund investing activities based on publicly disclosed data. Perry Capital is a well regarded fund, and Kyle Bass is obviously most known for successfully navigating the subprime crisis in 2008 to make a record profit. On the shorts side, there is only Bill Ackman left standing. Looking at the short interest as reported by NYSE, it seems pretty obvious that there is no one else of institutional size that is short Herbalife as Pershing Square accounts for the entire stake by simple math.
Carl Icahn (Icahn Enterprises)
1.4bn position (17mm shares)
Bill Ackman (Pershing Square)
20mm shares - originally 1bn position at inception, now 1.6bn (Shorted in 4Q 2012, 600mm unrealized losses)
George Soros (Soros Fund Management)
400mm position (5mm shares)
David Einhorn (Greenlight)
Not involved (shorted in mid 2012 profitably but exited by year-end)
Dan Loeb (Third Point)
350mm position (actively trading since 4Q 2013)
Richard Perry (Perry Capital)
~3mm shares (New as of 3Q 2013)
Kyle Bass (Hayman Capital)
1.3mm shares (New as of 3Q 2013)
How will this end? Concluding remarks
The reason why I don't think anyone should short Herbalife is that there are multiple ways for Ackman to lose. Even if the short thesis proved to be true, I believe that Herbalife and its management will quickly privatize itself to avoid any future issues going forward. This is not an unlikely strategy as many companies with public sentiment troubles chose to privatize themselves to come back after the storied controversies die down. I believe that Johnson is capable of making this happen to escape the worst-case scenario of a federal indictment. One only needs to look at how SAC fared its fate to get a sense of how being "right" is not always the only thing that counts in this industry. In conclusion, I refrain from deciding whether HLF is a pyramid scheme or not. For all I know, Bill Ackman might be entirely right. However, I ask the readers to take a step back and take a broader picture to see what matters here - the actual regulatory decision is irrelevant in consideration of the multiple ways Johnson can win in this scenario, the worst being a privatization at a premium with the big checks from himself and his friends who would gladly buy them out in today's world of cheap leverage. My lesson to share here would be that history is a valuable tool in investing, and fighting Mickey Mouse has rarely ended well.