3 Herbalife Directors Get Wise And Quit. Will Mr. Stiritz Be Next?

Mar.24.14 | About: Herbalife Ltd. (HLF)


Herbalife lost 3 directors.

One was not due for re-election.

Has Mr. Icahn given Mr. Stiritz a gift?

Herbalife (NYSE:HLF) investors woke up this morning to learn that 3 of the company's 13 directors are resigning. More specifically, two are not seeking re-election and one is resigning early.

Q. Who is the person resigning before the expiration of their term?

A. Colombe Nicholas.

Who is Colombe Nicholas?

According to Herbalife's proxy:

Colombe M. Nicholas , age 68, has served as a consultant to Financo Global Consulting, the international consulting division of Financo, Inc., since 2002. Prior to joining Financo, Ms. Nicholas served as the President and Chief Executive Officer of The Anne Klein Company from 1996 to 1999. Prior to that role she served as the President and Chief Executive Officer of Orr Felt Company, President and Chief Operating Officer of Giorgio Armani Fashion Corp., and President and Chief Executive Officer of Christian Dior New York. Ms. Nicholas currently serves on the boards of Kimco Realty Corporation and Tandy Brands Accessories, Inc. From November 2004 through March 2007 Ms. Nicholas served on the board of directors of Mills Corp., and from June 2004 until June 2007 she served on the board of directors of Oakley, Inc. She received a bachelor of arts degree from the University of Dayton and a juris doctorate degree from the University of Cincinnati College of Law, and holds an honorary doctorate in business administration from Bryant College of Rhode Island. Ms. Nicholas's qualifications to serve on our Board include her significant consumer marketing experience, which is relevant to the Company's business operations in selling, and in certain circumstances, manufacturing, personal care and beauty treatment products; her prior service as a chief executive officer, which helps the Board better understand management's day-to-day actions and responsibilities; and her service on other public company boards, which adds a depth of knowledge to our Board as to best practices in corporate governance.

Judging from Ms. Nicholas CV, she has a keen sense of fashion. Due to the recent announcement that the FTC is investigating Herbalife, it would seem that being a director on the Herbalife Board is no longer "in fashion." Like Flashdance and leg warmers or Madonna's lace gloves, peddling shake mix is on the outs.

Kudos to these three individuals for stepping down from Herbalife. Whether or not their motives are egocentric or benevolent, the result is still the same. Three credible individuals with successful business careers have separated themselves from this global confidence game. Good for them!

Stepping into the breach we learn that Mr. Icahn has pushed forth 3 new nominees. The size of the board does not change nor does Mr. Icahn's ownership stake. It strikes me as somewhat obvious that absent the support of Herbalife's largest shareholder, Herbalife wasn't going to have much success at all finding new Board members. Even Mr. Stiritz, who owns 7% of the company, has not requested his own board seat. Mr. Icahn gets 5 seats for his 17 million shares. Mr. Stiritz has no board representation for his 7 million shares.

One has to wonder why. Unless Mr. Stiritz is wisely capping his potential liability. This is the answer that seems to make the most sense to me.

As to why the company would want to give up control of 38% of the Board to an investor who owns less than 25% of the company your guess is as good as mine.

Still, desperate times call for desperate measures.

This morning, HLF common is trading higher on the news of the HLF board nominees and the news out of China that Nu Skin (NYSE:NUS) escaped with a wrist slap.

Q. Has Mr. Icahn given Mr. Stiritz a gift?

Right now, Mr. Stiritz could probably unwind a good chunk of his long position due to the bid offered by Mr. Icahn's friendly hands.

Ms. Black, Mr. Levitt, and Ms. Colombe "hit the bid" and ran for the exits. My guess is they will be thanking their lucky stars less than a year from now for making that decision.

Will any of them turn state's evidence? I guess we can only wonder.

Will roving reporters try to reach out to them to find out their reason for leaving? We will have to wait and see.

Q.: Will Mr. Stiritz follow them soon too or not?

Mr. Icahn has boxed himself into a long squeeze. If it turns out that Herbalife is prosecuted as a confidence game and pyramid scheme, this long squeeze presents unique opportunity to other longs and shorts.

Other longs can get out, perhaps, from their smaller positions due to the large percentage of the float controlled by Mr. Icahn, underpinned by the company's buyback program, and owned by executives.

Meanwhile, shorts can take advantage of the seemingly irrational $5 billion market cap to add to their positions too.

Ironically, after more than a year of shenanigans, HLF common trades pretty close to the price of Mr. Ackman's original short. What should investors do now?

Mr. Market seems to be discounting HLF as a coin flip right now.

Head it's a $0. Tails it's $100.

Doubtful the company's intrinsic value is $52. Very doubtful indeed.

At some point in the next year in all likelihood, HLF's intrinsic value will be uncovered.

3 HLF board members aren't sticking around to find out. As to who else might head for the exits or join the party - as always, the theater is uber-entertaining.

Investment Thesis: Herbalife is a consumer products company that manufactures an over-priced shake mix that has many market substitutes at lower prices. The company moves its product by sponsoring a marketing Plan that is a pyramid scheme.

The shake mix is an incidental device used to peddle the company's real product - namely the sale of "The American Dream."

For most participants the dream turns into a nightmare of financial loss, wasted human capital, and damaged self-esteem. The company relies upon an endless chain of new recruits to sustain itself. Endless chains are destined to fail. Endless chains are pyramid schemes.

Regulators will shutter the HLF pyramid scheme and prevent further harm to "business opportunity seekers" while seeking damages and restitution from the company for civil injury to date.

HLF common, on that basis, is worth $0 per share.

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.