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.