There were a slew of announcements yesterday that caused the share price of Herbalife (HLF) to go on a rollercoaster ride ultimately closing up 7%. This on a day when the S&P 500 lost 2.28%, the DOW fell 2.08%, and the NASDAQ fell 2.61%. A positive move in the face of a terrible tape is generally a very bullish signal and this, combined with today's announcement from Herbalife, are likely signs of significant near-term price appreciation.
Herbalife Announces Preliminary 4th Quarter Results/Short Seller Fires Shot Across the Bow
Below is a summary of the news from yesterday that ultimately launched Herbalife shares to a 7% gain:
- Herbalife expects 4th Quarter Earnings per Share of $1.26 - $1.30; beating analysts' estimates of $1.17
- Herbalife expects nets sales growth of 19.8%; beating analysts' estimates 15.5%
- Herbalife Expects volume points to increase 13.1% for full year and 12.7% for 4th quarter 2013
- The Board of Directors increased the share repurchase authorization to $1.5 billion to include available balance of $653 million and expects to begin buying back shares
- Herbalife to offer $1 billion of convertible notes as part of share repurchase program
- Herbalife projects 1st quarter 2014 Earnings per Share of $1.24 - $1.28 vs. analyst estimates of $1.40; lower projection caused by $0.20 adverse currency exchange rate
- Herbalife short-seller Bill Ackman, of Pershing Square Capital Management launched another website.
The 4th quarter earnings beat of 7.5% to 11% is further evidence that Herbalife management continues to execute. However, the preannouncement, at least on its face, is admittedly mixed when you factor in the softer than expected guidance. Shareholders will have to wait until February 18th, to hear management's explanation of the adverse currency exchange rate causing them guide below analyst's expectations for Q1-2014. While the preannouncement of results is certainly important to long-term shareholders, the announcement of a $1.5 billion share repurchase program and $1 billion convertible note offering will be the driver for near-term price appreciation (more on that later).
Not to be outdone by positive news from Herbalife, Bill Ackman launched a new website. The site seems to be a change in strategy for Mr. Ackman as it moves from attacking Herbalife the company, to attacking individual Herbalife distributors. It is difficult to imagine what Mr. Ackman expects to gain by bullying the little guy, so it will be interesting to hear an explanation from Pershing Square about this obvious sea change in strategy.
The $1.5 billion Buyback and The Convertible Note Offering
Herbalife has $653 million remaining from their previous board approved buyback program and announced that the Board of Directors have increased the buyback to $1.5 billion, a portion of which will be funded by a $1 billion aggregate principal amount of convertible senior notes due in 2019. This is a private offering with the following investment banks participating:
Bank of America - Merrill Lynch (BAC)
Credit Suisse (CS)
Morgan Stanley (MS)
The participating investment banks have an option to purchase an additional $150 million and Herbalife announced that they anticipate granting this option. This is important because it is an indication that Herbalife expects the notes will be in high demand.
Herbalife Notes Priced at a 25% Premium
Today we heard additional bullish news that Herbalife priced the convertible notes at $86.28, which is a 25% premium over yesterday's closing price of $69.02. This news is significant because it is an indication that Bank of America - Merrill Lynch, Credit Suisse, HSBC, and Morgan Stanley anticipate share price appreciation in Herbalife shares to exceed the 25% premium they are paying.
Deal Appears to shut Out Pershing Square
Back in November 2013, Mr. Ackman was asked about the possibility of Herbalife coordinating a significant buyback or leveraged buyout in response to his huge short bet. Mr. Ackman's response follows:
Ackman says Pershing will "replace the position with credit default swaps [and] will take [the fight] to the end of the earth."
Mr. Ackman telegraphed his plan, and it appears that Herbalife was listening. Buried within Herbalife's disclosure is the following:
The company has been advised that, in connection with establishing their initial hedges of the Capped Call Transactions, the Option Counterparties expect to purchase the common shares over a five trading day period immediately following the pricing of the Convertible Notes. Hedging of the Forward Transactions and Capped Call Transactions could have the effect of increasing, or reducing the size of any decrease in, the price of the Convertible Notes or the common shares concurrently with, or shortly after, the pricing of the Convertible Notes.
This means that starting today and for the next four trading days after today, Bank of America - Merrill Lynch, Credit Suisse, HSBC, and Morgan Stanley will be in the market buying Herbalife and simultaneously finding option counterparties for the convertible offering. This lessens the immediate run-up in the stock price, significantly reduces the tradeable float, and caps any future dilution; all of which leave a leveraged buyout still in play and arguably more feasible.
Since this is all happening over the next 5 days, and occurring in concert, it appears to effectively eliminate the opportunity for Mr. Ackman to replace his position with credit default swaps because the bet against the convertible offering (hedge) is effectively already made by design of the offering.
Shares of Herbalife rallied yesterday in the face of a very negative tape which is a bullish signal and news today that the Herbalife convertible notes priced at a 25% premium to yesterday's closing price is further news to support the bull thesis. It appears unlikely that Mr. Ackman will be able to obtain credit default swaps, and his change in strategy from attacking Herbalife to attacking individual Herbalife distributors is puzzling at best. It appears that the Herbalife saga may be coming to a close and the result will be significant share price appreciation.