Shares of Herbalife (HLF) have had a rocky few weeks as headlines flew that helped both the bulls and the bears. Last week, shares were first rocked by news China was investigating Nu Skin (NUS), which also employs a multi-level marketing (MLM) strategy. Then, Massachusetts Senator Ed Markey sent a letter to the FTC and SEC asking for an inquiry into HLF. This news sent shares spiraling lower, as it seemingly gave credibility to Bill Ackman's argument that Herbalife is a pyramid scheme.
However, shares rallied over 6% on Monday as news came out that vastly increased the perceived likelihood for a leveraged buyout. First, it was learned that Tim Ramey, an analyst for D.A. Davidson, had left his job. He is one of the bigger Herbalife bulls on Wall Street and has consistently dismissed the notion the company is fraudulent. In fact, he believes shares are worth $115, which would suggest 80% from current levels.
Now, it turns out that Ramey has left his analyst job to join Post Holdings (POST), best known for its cereal, as a director of strategic ventures as a consultant (Bloomberg report available here). In this job, Ramey will report directly to Post CEO, Bill Stiritz. Here is where things get interesting for Herbalife. Stiritz has a 6.38% stake in Herbalife, according to an SEC filing (available here). Now, it is important to note Mr. Stiritz filed a 13D. This means that he is an activist investor who will seek change rather than be a passive holder.
Mr. Stiritz has publicly supported either a major leveraged share repurchase or even a go-private transaction, which he would be willing to be involved in. Hiring the most bullish Wall Street analyst to consult on "strategic ventures" suggests that Stiritz may be prepared to more strongly push for action or get involved in a bid for the company. Of course, any analysis of the suggestion must take into account Carl Icahn, who has a 16.5% stake in Herbalife and also supports a major repurchase along the lines of what he asked Dell to do in 2013.
It is exceedingly difficult to predict whether a company will be bought out, and predicting the timing of a transaction is all but impossible. However, the fact Mr. Stiritz has hired Mr. Ramey suggests there is a higher probability of a deal or major buyback in the next 3-6 months. Stock prices reflect risks (both upside and downside), and the hiring of Ramey increases the risk to the upside, especially as a deal would likely have to be done at around $100 to garner enough shareholder support as the company should generate over $8 in operating cash flow this year. Shorting a stock when there are interested suitors can be a dangerous game.
This announcement is also important for another reason. Many investors headed for the exits last week after the Markey letter was disclosed as it seemed more likely that Ackman was correct in his analysis. There would be serious reason for concern if major HLF bulls like Stiritz were selling on the news. However, Stiritz appears ready to get more involved in HLF. In other words, his conviction in the company is unshaken, which can give concerned investors a sigh of relief.
There has also been concern that it could be harder to raise money for a leveraged recapitalization or buyout in the wake of the Markey letter, which is why the presence of Stiritz and potentially Icahn in any offer will be critical as lenders will want an equity cushion provided by respected investors. Investors have been waiting for Herbalife to announce some major repurchase plan, and it appears that Mr. Stiritz is in fact tired of waiting and is prepared to push for action.
At $66, shares of Herbalife are very cheap at only 8-8.5x 2014 operating cash flow not to mention the company's $892 million cash hoard, though it also holds $950 million in debt. With the potential for a takeover offer, buying shares makes a lot of sense here. Over the past three years, betting against Carl Icahn has been a fool's errand, and it now appears Stiritz is prepared to take action due to his hiring of Mr. Ramey. At this point, it is far too dangerous to be short HLF as a capital plan could send shares up 50% quickly. With the potential for a buyout or major repurchase, the only play in Herbalife is to be long or on the sidelines.