Make no mistake, Herbalife and Carl Icahn seem to be cooking up a little something. What it is, and the reasoning behind it? We don't really have that yet. But, let's look at some of the possible options.
It was announced yesterday that Herbalife is changing the date of their general meeting of shareholders, "in order to allow the company to continue its discussions with Carl Icahn regarding potentially adding additional Icahn nominees" to the BOD:
Herbalife Ltd. (NYSE-HLF) announced that it has rescheduled its 2014 Annual General Meeting of Shareholders to now occur at10:30 a.m. PDT on April 29, 2014, in order to allow the company to continue its discussions with Carl Icahn regarding potentially adding additional Icahn nominees to Herbalife's board of directors. The meeting will be held at 800 W. Olympic Boulevard, Suite 406, Los Angeles, California
The Board of Directors, interesting. This was an issue that was never really a pressure point for Ackman until he pushed it on the last China call. We haven't really taken the time to stop and think about the immense amount of liability there is on the BOD if Herbalife is found to be operating in a fraudulent manner.
Not just fiduciary liability, but in the case of someone like John Tartol, potentially personal liability.
Ackman is a master strategist, and I found it to be a potent point of pressure for him to bring up the BOD and plant some seeds of doubt in the heads of people already serving on the Board. After all, if I were on Herbalife's Board, I wouldn't be sleeping very soundly, nor would I be happy about sharing a boardroom with John Tartol, as he's presented with checks that came directly from the pockets of impoverished minorities.
I found it interesting when Ackman highlighted this on his call, and don't think it's a coincidence that Herbalife came out with their AGM announcement just days later.
It was additionally focused on by Michelle Celarier in her article in the NY Post Business Section this morning. She pointed out that Ackman had sent letters to the Board reminding them of their positions and the accompanying liability, something I had heard of for the first time - yet another prong to Ackman's relentless approach. The article read:
The FTC probe was announced Wednesday, and the normally loquacious Icahn has yet to comment on it.
Icahn didn't return calls for comment on Thursday.
But on Monday, Icahn was on CNBC promoting the company and bashing his nemesis, Bill Ackman, and the hedgie's $1 billion short on Herbalife, saying Ackman's actions almost border "on the insane."
In a public presentation Tuesday, Ackman didn't mention Icahn but said he had written two letters to Herbalife board members warning them of their "enormous personal liability" if the company is found to be a pyramid scheme.
Which leads me to Icahn's appearance on CNBC on Monday. Listening to it again, and having been familiar with everything Icahn and Ackman have both said about Herbalife 1,000 times over; it really sounds like the first time Icahn could allude to possibly, possibly, backtracking. Further, he sounded annoyed when he barked about Ackman, but it almost sounded as if he was agitated with himself, interestingly enough.
But, back to the press release regarding the AGM.
(In story disclosure: I am not a securities lawyer and am simply making potential, unfounded predictions)
The timing isn't what's suspect per se - the DEF 14/D is due well in advance of the annual general meeting, so the number of options as to what this means are broken down, generally, into the following:
1. They needed to amend the DEF 14/D and needed 5 more days to do it. In the event that new board members are going to be nominated (or withdrawn) the document needs to be edited accordingly and inclusive of the bios of the new board members, as well as updates on the company's current share count and other items to be voted on by shareholders.
2. As a product of the buyback increasing the percentage of shares that Icahn now owns, he is entitled to more Board seats and the company is inquiring with Carl regarding that and possibly:
- Using it an opportunity to put out a PR with his name on it post-FTC announcement
- Simply asking him if he wants to take on the new seats he is entitled to.
3. Icahn, in true "I've simply lost my mind" fashion has decided he wants to double down against Ackman in the face against demonstrable evidence and actually place more BOD members in the face of an FTC investigation. Elderly people do quirky things sometimes - personal grudges fuel some stupid decisions. But, I've seen crazier things in my time on Earth. While the rational part of me had trouble understanding what Icahn was even doing in this trade without seemingly even knowing the ticker symbol, he remains long.
That same rational part of me is tugging at my brain, wondering why he'd be placing BOD members on in the midst of an investigation that I feel will yield materially negative consequences for Herbalife. But, I give up trying to be rational with Icahn and Stiritz.
4. The company or Carl Icahn will be using this PR as an "out," as we'd say in poker. Either the company has BOD members talking about resigning or Icahn wants to get his guys off the board and they're using this as an excuse to put shareholders on notice and on hold, while the dirty work behind the scenes takes place.
Lest we forget, if Herbalife is in fact buying shares back after this news to keep the price propped up, is that proper? Additionally, and not often discussed, if you were an Icahn Enterprises (NYSE:IEP) investor, isn't there liability to those investors that needs to be discussed by remaining in an Herbalife position?
One thing is for sure, something is going on behind the scenes, and if it's material we're likely to find out in the next few days, whether it's through an 8-K announcing departure or officers/directors or through whatever Herbalife puts in their proxy statement about BOD nominees.
Regardless, Herbalife remains a massive risk as an investment. As I highlighted in my article, "Herbalife at Risk: The FTC Can't Ignore the Demonstrable Evidence" yesterday, the FTC is not the type of organization that ignores the evidence:
When I think about the words, demonstrable evidence, this is exactly what I think of. These are the types of ad hominem attacks that the company and its longs have used during the duration of this affair. After Ackman's original thesis, it was clear that the company was acting in an extremely questionable manner. After a presentation like this regarding China, it continues to be crystal clear. the challenge for investors seems to be focusing on the evidence, and not the noise coming out of the long side of this argument. If I witness a crime and point out the evidence, and then the person accused of committing it calls me names and lashes out at me publicly, does that make the evidence of a crime any less potent as evidence at its core?
However, the FTC simply doesn't ignore evidence. They're an organization full of intelligent professionals who think critically, not based on headlines or PR. And, they're not the type of organization that would be looking into a company if there wasn't something that appeared suspect. So, something has already caught the ears of the FTC. As they look further, there's a chance for the whole ball of yarn to become unwound.
And evidence, despite what the longs will tell you, is what the shorts case is based on.
I remain bearish on Herbalife, added to my put position yesterday, and reserve the right to add, close, or change my position at any time without notice. Best of luck to all investors.
Disclosure: I am short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.