Seeking Alpha

Ackman converts 40% of Herbalife short to long-term puts, questions buyback

  • Bill Ackman has shifted his strategy. Pershing Square has converted around 40% of its Herbalife (HLF) short into long-term put options, which will allow the hedge fund to "make a similar amount of profit as if [it] had maintained the entire initial short position" assuming HLF fails "within a reasonable amount of time."
  • This reduces the percentage of the float sold short and, to quote Ackman, if "a substantial component of the bull case ... is predicated on forcing [Pershing Square] to cover [then] the restructuring of [the] investment negates [an] important pillar of the bull case."
  • Perhaps more important is Ackman's take on HLF's chances of launching an investment grade bond issue to fund a $2B buyback: "When Moody's withdrew its ratings on HLF, the company was rated Ba1, a junk rating [and] had only $178M of debt, approximately 0.5x 12-month trailing operating profits. If HLF were to issue $2B of additional debt today [it] would have $3B of total debt, or 4.3 times 12-month trailing operating profits."
  • The point: In the event of a $2B bond issue, the company would have 16 times as much debt as it did when Moody's rated it in junk territory. Given this, Ackman wonders how HLF could possibly garner an investment grade rating, let alone an interest rate of 4% (the Tim Ramey thesis).
  • Full Pershing Square letter here.
Comments (19)
  • jioo
    , contributor
    Comments (3) | Send Message
    they currently have over 950mm debt outstanding between their credit facility and term loan and the interest rate is around 2% - not sure how ackman's point makes any sense
    2 Oct 2013, 11:14 PM Reply Like
  • Continental Kid
    , contributor
    Comments (197) | Send Message
    Ackman is starting to feel the pressure...covering his short stock position...and now just playing options to the downside.....maybe his covering pushed HLF up into the 70's ....again he was as wrong on this as he was on JCP....guy is the most overated guesser on the planet....
    2 Oct 2013, 11:22 PM Reply Like
  • PSalerno
    , contributor
    Comments (3695) | Send Message
    Ackman was not wrong. He converted one short position into another short position.
    3 Oct 2013, 02:05 AM Reply Like
  • G. Hudson
    , contributor
    Comments (296) | Send Message
    If Ackman is thinking that audited financial statements with a clean bill of health aren't coming, why cover some of his shorts and replace them with long term puts NOW?


    ANSWER: Ackman knows a clean bill of health from audited statements is coming. He doesn't want his fellow shorts to start covering and driving up the price so he comes up with the story about buying puts- "make a similar amount of profit as if [it] had maintained the entire initial short position" assuming HLF fails "within a reasonable amount of time."


    So lets analyze this statement- if he thinks are CPA firm won't give a clean bill of health - share price drop would be immediate so no need for longer term puts -> he would have bought short term cheaper puts and make the most profit -




    ANSWER-> What ACKMAN DOESN'T SAY- is at what strike price those puts were purchased at -> REASON-> He bought a lot of CHEAP PUTS at a price so below the current stock share price that the likelihood of them being in the money is remote (reason for including "ASSUMING HLF fails") but he bought enough to make that comment ("similar amount of profit") so other shorts didn't realize he is in the process of covering.


    REMEMBER- He was a supporter of JC Penney right up to when he made a deal to exit that trade too!
    4 Oct 2013, 09:13 AM Reply Like
  • toddyogi
    , contributor
    Comments (109) | Send Message
    Why HLF is very unlikely to be shut down:

    2 Oct 2013, 11:51 PM Reply Like
  • Jeremy Raper
    , contributor
    Comments (67) | Send Message
    what he said re reducing the short interest is actually just plain wrong and very misleading. whoever sold him the puts - a large broker like GS, or JPM, most likely - will need to sell stock to hedge their short put position vs Ackman (as no broker is going to take massive long risk over a number of years in HLF). they will only be able to do this by utilizing the same borrow that Ackman is releasing.


    additionally - HLF vol is pretty high, even long-dated. so while slow, the decay on these options will be pretty severe over time.
    3 Oct 2013, 12:56 AM Reply Like
  • Herbalifestudy
    , contributor
    Comments (164) | Send Message
    PS just left their lemmings hanging bigtime. Same time, he is of course doing his rethorics about conviction so that other shorts do not cover en masse. Lets see!
    3 Oct 2013, 01:39 AM Reply Like
  • Herbalifestudy
    , contributor
    Comments (164) | Send Message
    Zerohedge comments on PS Q3 letter
    3 Oct 2013, 01:59 AM Reply Like
  • rubiconrich
    , contributor
    Comments (222) | Send Message
    Explains some of the recent run up. Still stuck with a sizable chunk of short shares and is trying to put a spin on the fact that he is starting to "sweat it out"
    3 Oct 2013, 08:39 AM Reply Like
  • Deja Vu
    , contributor
    Comments (1201) | Send Message
    Watch for a close 5 days above $73. Then iCon will dump his lot.
    3 Oct 2013, 08:46 AM Reply Like
  • SA Editor Stephen Alpher
    , contributor
    Comments (540) | Send Message
    Capitulation. I wonder who the counterparty is?
    3 Oct 2013, 09:06 AM Reply Like
  • Goose705
    , contributor
    Comments (2) | Send Message
    Thanks to Bill and all his die hard supporters for allowing me to double my money in hlf. Can't wait to hear his next short idea.
    3 Oct 2013, 09:13 AM Reply Like
  • Keyser Smith Jones Soze
    , contributor
    Comments (99) | Send Message
    I don't know much about Ackman or HLF, but there is an aspect of this that has bothered me since it began. If Ackman wanted his criticism of HLF to be taken seriously, with honest motivation, he should not have taken a short position. He took the short position and then attempted to cause HLF to have the legal hot water that he said it should be having. And he obviously was successful in manipulating the valuation of the stock. It seems overtly unethical to me. He has been investigated before, but I think he should be investigated again.
    3 Oct 2013, 09:56 AM Reply Like
  • dteb
    , contributor
    Comment (1) | Send Message
    Ackman most likely had a custom Total Return Swap made to synthetically give him a "cover" on ~16M shares short (~40% of his total position) and convert to synthetic puts 1-2 years out. It's unlikely he 1) covered anything in the open market, or 2) bought puts in the open market. Open interest would confirm that. So technically the stock would still be out short, and the tradeable float still constricted. I dont believe the 16M shares are back in the market.
    3 Oct 2013, 10:00 AM Reply Like
  • Jeremy Raper
    , contributor
    Comments (67) | Send Message
    Dteb - that is an interesting possibility. But he also could have just bought the OTC puts vs a broker (in fact this is the most likely), so the open interest on listed options will not show this. And of course the broker on the other side still needs to sell stock to hedge.
    3 Oct 2013, 11:49 AM Reply Like
  • Keyser Smith Jones Soze
    , contributor
    Comments (99) | Send Message
    The stock has gain appreciably in recent weeks, but it seems to me that it is nowhere near done. The P/E is still very low for a company that has demonstrated the amount of earnings growth that it has demonstrated in recent years. There is a strong arfument here that the valuation should be at least double what it is. Even prior to the debacle, in early 2012, it was probably somewhat undervalued, and if it had kept on the same trend line, today it would be in the $100 - $125 range. I think it should have no trouble going to $100 at least, and it does not seem likely to me that any major shareholders would cash out prior to it getting at least to that point. And even then, there would be no compeling reason for anyone to cash out. The bottom line is that fundamentally it is still undervalued to a very substantial degree.
    3 Oct 2013, 11:15 AM Reply Like
  • jeezuz30
    , contributor
    Comments (301) | Send Message
    Why down 7% today?
    3 Oct 2013, 12:11 PM Reply Like
  • Herbalifestudy
    , contributor
    Comments (164) | Send Message
    @Jeezuz30 - I ask myself the same!
    - We had indeed many speculative longs who indeed were in it just because of squeeze potential trade, unfortunately
    - someone frontrunning Icahn
    - Ackman repeats his conviction so some traders get nervous and take profits, or leave


    To me this is highly bullish, Ackman has started to cover, period.
    4 Oct 2013, 02:03 AM Reply Like
  • BuyBack King
    , contributor
    Comments (52) | Send Message
    Hlf should just continue the existing buyback. There was nothing wrong with Borders, HLF, or Target. The only thing wrong with Target is that it raises its dividends too fast (>15%) for the average investor. Thank god he is not on that board.
    5 Oct 2013, 06:23 AM Reply Like
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