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Herbalife's Mexican Tax Problem - $100M USD Plus

|Includes: Herbalife Ltd. (HLF)

Herbalife's most recent 10 Q set out at page 61, five (5) paragraphs of important information regarding over $100 Million US in Tax Assessments it has received from the Mexican Tax Administration Service (hereinafter "MTAS"). Further info is in the Contingencies note.

The summary of this important page 61 information is as follows:

Herbalife currently has a potential $107 Million USD exposure to MTAS for years 2005 through Sep 2007.

- MTAS has assessed Herbalife $85 Million USD for years 2005-2006

- MTAS has assessed Herbalife $22 Million USD for Jan 2007 to Sep 2007

- MTAS has closed an audit without assessment for the 2011 year

- MTAS has requested information for the 2010 Year

- MTAS has requested information for the 2012 year

- It would be reasonable to assume MTAS will eventually request information for 2013 and 2014 (2008 and 2009 also?).

In order to appeal these assessments, Herbalife entered into agreements with Insurance Co's for the issuance of potential Surety bonds.

Herbalife filed an appeal with MTAS for the $85 Million. Herbalife reports that MTAS issued a resolution that nullified the assessment. However, Herbalife further notes that the nullification resolution is not legally binding on MTAS and MTAS can review and re-issue some or all of the findings. Accordingly, Herbalife commenced litigation in the Tax Court of Mexico to dispute the assessment. MTAS has responded and challenged Herbalife's assertions. Litigation continues. No surety bond was noted as issued.

Herbalife filed an administrative appeal for the $22 Million assessment. This appeal was denied by MTAS and they requested further information from Herbalife on VAT refunds claimed. Herbalife intends to appeal the denial decision. However, to do so, Herbalife had to issue (October 2014) a surety bond in the amount of $23.6M. Herbalife noted "The Company has not recognized a loss as the Company does not believe a loss is probable".

At this point, lets quickly dive into Surety's. Surety's have three parties. Recipient, Principal and the Surety. In this case the Recipient is MTAS, Principal is Herbalife and Surety is the Insurance Co. The Surety charges a premium for the provision of the Surety's guarantee to pay, this is based on the perceived credit risk of the Principal and penal sum, the latter being a maximum exposure the Surety would have in the event of the Principal imploding.

Now consider for a moment that this known $107M in assessments represents only 2005, 2006 and nine months of 2007. Consider the fact that 2010 is now under review. 2012 is now under review and 2013 and 2014 are sure to follow.

Were you to conservatively estimate $25 Million in assessments for each of these years you would be at $207 Million USD in assessments before interest and inflation adjustments as mandated by MTAS.

Some quick questions that spring up are:

1. How would the stock react to $207 Million plus USD in fines against Herbalife?

2. If Herbalife did not pay, would the 40,000 plus Nutrition Clubs be shut down by MTAS? What would that do to EPS?

3. Why have Analysts not noted in their reports and or asked about this issue on the conference calls?

4. Has Carl Icahn done this quick and dirty analysis?

5. Will any Insurance Companies take on this risk (for future Surety's) given Herbalife's declining sales, profit and FTC issues? Is there any amount of premium you can charge to make this work?

6. Has the FTC done this analysis?

Disclosure: The author is short HLF.