- Carl Icahn is sending three of his own into the Herbalife abyss.
- This is the last arrow in Icahn's quiver.
- Regarding its effect on the FTC investigation, it's a meaningless gesture with zero material impact.
As I said in my very recently published article, "Icahn and Tartol Are Stuck in a Room with No Exits", Carl Icahn has very few moves left that will not cost him any money and not potentially cripple Herbalife's (NYSE:HLF) stock. This morning's news seemed to be the last arrow he had in his quiver, short of simply conceding defeat, which it doesn't look like he's going to do - yet.
It was announced this morning that Carl Icahn is sending three of his own for nomination to Herbalife's Board of Directors. Shares were up as much as 8% on paltry volume, but the bid has already been taken down about $1 since writing this article.
Nutritional-products maker Herbalife Ltd. said on Monday it will nominate three additional Carl Icahn designees to its board. The move comes after the company last week said it would postpone its annual meeting to April 29 from April 24 to continue discussions with the hedge-fund titan, whose Icahn Enterprises owns 17% of Herbalife shares. The three designees up for election at the annual meeting are Hunter Gary, Jesse Lynn and James Nelson. Icahn said in the statement on Monday that "we remain resolute in our commitment to the long-term success of Herbalife" and that his representatives "will enhance value" at company, as they have done with other firms over the past decade. Herbalife is currently being investigated by the U.S. Federal Trade Commission. Herbalife shares rallied 8% ahead of the open on Monday.
The difference being that Icahn's newly elected Board Members will likely not have the same liability as the past board for Herbalife's alleged transgressions over the last 30+ years, should the FTC find the company to be operating an illegal pyramid scheme.
Which leads me to think, what would investors in Icahn Enterprises (NASDAQ:IEP) think about the timing of this move? Carl is essentially introducing more liability and exposure than he needs to for his investors. Icahn, presented with a chance to acknowledge that he's likely got it wrong on Herbalife, is sending three of his own into the abyss? After all, Carl's argument for investing was that the company was not going to be investigated by the FTC, remember?
I can't wait to get old and rich, I'm going to do crazy stuff, too.
It was reported this morning that Carl Icahn is going to be placing three members onto Herbalife's Board of Directors. Shares rallied 8% pre-market on light volume. Since I've started writing this article, and as volume has come in, the bid has been taken down almost a dollar.
Meanwhile, this is news that Michelle Celarier at the New York Post basically already reported on last week, with the most important part being that Icahn isn't likely to add to his position:
While Icahn, who has a 17 percent stake in the distributor of weight-loss shakes, has not made up his mind yet on whether he will name an added board member, he has determined he will not buy more Herbalife shares as part of that deal, sources said.
The FTC probe could last for a year or more, sources said.
So, that begs the first obvious question - if Icahn was taking more control over the company with 3 new board members, why wouldn't he want to raise his stake in the company's holdings. Also, is this simply a de facto move as a result of Icahn owning a higher percentage of the outstanding shares due to the buyback? Surely, he's just claiming what's rightfully his here, a move that will cost him little more than he already has at risk - right?
And, while we're speaking of that, are we going to get more information as to how much of the buyback has taken place in the upcoming proxy and/or general meeting? I'd be curious to know how much work the company has put in over the past two weeks in trying to prop up its price - if any.
And, the directors have yet to be elected - although I'm absolutely sure that it's not going to be an issue. Further, why up 8% on this news? Icahn had already pledged his credibility to Herbalife, so why it is a surprise that he's taking a free "double down" card while he's already holding a soft 16 - it can't get any worse, right?
Additionally, let us remember that to the FTC, Icahn's addition of board members has little or nothing to do with what they're looking for, exactly. The FTC is investigating the company's business model, how it's operated over the last 30+ years, and whether or not the company is a pyramid scheme. No matter who is on the board of directors, it isn't going to change that the company seemingly doesn't enforce their own "gold standard" rules, seems to be running a pure MLM business model in China, has some questionable accounting practices in how they book their China royalties, and has the "pyramid scheme" evidence piled against it.
Those who take this as a sign of positivity are similar to those who took the PwC audit as a sign of positivity - right before the FTC decided to investigate. Yes, it's a great headline, but no - it has no fundamental effect on the underlying business model that is going to drive the outcome of the FTC's case.
Like the audit, which once again, affirmed that the company was booking things in accordance with GAAP but did not look at the underlying business model, this can be taken as a faux-bullish headline. Ultimately, when it comes to the FTC investigation into Herbalife, Icahn placing three board members into the company right now is essentially meaningless.
Don't get tricked into slapping the ask of someone who can see the forest through the trees here. I contend that this is in no way a buying opportunity and that we are still likely to see Herbalife shares right themselves, possibly before close today, and continue their decline into the high $40s this week.
Best of luck to all investors.